While small-cap stocks, such as Kangaroo Resources Limited (ASX:KRL) with its market cap of AU$65.17M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since KRL is loss-making right now, it’s essential to understand the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Though, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into KRL here.

Does KRL generate an acceptable amount of cash through operations?

Over the past year, KRL has reduced its debt from AU$42.92M to AU$31.25M , which is mainly comprised of near term debt. With this debt repayment, KRL currently has AU$1.74M remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of KRL’s operating efficiency ratios such as ROA here.

Does KRL’s liquid assets cover its short-term commitments?

At the current liabilities level of AU$37.58M liabilities, it appears that the company is not able to meet these obligations given the level of current assets of AU$6.17M, with a current ratio of 0.16x below the prudent level of 3x.

Does KRL face the risk of succumbing to its debt-load?

With debt at 28.55% of equity, KRL may be thought of as appropriately levered. KRL is not taking on too much debt commitment, which may be constraining for future growth. Risk around debt is very low for KRL, and the company also has the ability and headroom to increase debt if needed going forward.

Next Steps:

KRL’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I’m sure KRL has company-specific issues impacting its capital structure decisions. I suggest you continue to research Kangaroo Resources to get a better picture of the stock by looking at: