What does KSK Power Ventur plc’s (LSE:KSK) Balance Sheet Tell Us Abouts Its Future?
KSK Power Ventur plc (LSE:KSK) is a small-cap stock with a market capitalization of GBP £64.86M. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? A major downturn in the energy industry has resulted in over 150 companies going bankrupt and has put more than 100 on the verge of a collapse, primarily due to excessive debt. These factors make a basic understanding of a company’s financial position of utmost importance for a potential investor. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. View our latest analysis for KSK Power Ventur
How does KSK’s operating cash flow stack up against its debt?
While failure to manage cash has been one of the major reasons behind the demise of a lot of small businesses, mismanagement comes into the light during tough situations such as an economic recession. These adverse events bring devastation and yet does not absolve the company from its debt. Fortunately, we can test the company’s capacity to pay back its debtholders without summoning any catastrophes by looking at how much cash it generates from its current operations. Last year, KSK’s operating cash flow was 0.04x its current debt. This means what KSK can generate on an annual basis only covers less than a tenth of what it actually owes its debtors in the near term, which raises a red flag.
Can KSK pay its short-term liabilities?
In addition to debtholders, a company must be able to pay its bills and salaries to keep the business running. In times of adverse events, KSK may need to liquidate its short-term assets to pay these immediate obligations. We should examine if the company’s cash and short-term investment levels match its current liabilities. Our analysis shows that KSK is unable to meet all of its upcoming commitments with its cash and other short-term assets. While this is not abnormal for companies, as their cash is better invested in the business or returned to investors than lying around, it does bring about some concerns should any unfavourable circumstances arise.
Does KSK face the risk of succumbing to its debt-load?
A substantially higher debt poses a significant threat to a company’s profitability during a downturn. For KSK, the debt-to-equity ratio stands at above 100%, which indicates that the company is holding a high level of debt relative to its net worth. In the event of financial turmoil, the company may experience difficulty meeting interest and other debt obligations. We can test if KSK’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings should cover interest by at least three times, therefore reducing concerns when profit is highly volatile. KSK’s interest on debt is not strongly covered by earnings as it sits at around 0.56x. Lenders may be more reluctant to lend out more funding as KSK’s low interest coverage already puts the company at higher risk of default.
Next Steps:
Are you a shareholder? KSK’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. In addition to this, the company may struggle to meet its near term liabilities should an adverse event occur. Moving forward, its financial position may be different. I recommend keeping abreast of market expectations for KSK’s future growth on our free analysis platform.
Are you a potential investor? KSK’s large debt ratio on top of poor cash coverage in addition to low liquidity coverage of near-term obligations may scare some investors away intially. However, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of KSK’s track record. As a following step, you should take a look at KSK’s past performance analysis on our free platform to conclude on KSK’s financial health.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
