Investors are always looking for growth in small-cap stocks like Kelt Exploration Ltd. (TSE:KEL), with a market cap of CA$979m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We’ll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, this is just a partial view of the stock, and I recommend you dig deeper yourself into KEL here.
Does KEL Produce Much Cash Relative To Its Debt?
KEL’s debt levels surged from CA$166m to CA$247m over the last 12 months – this includes long-term debt. With this increase in debt, the current cash and short-term investment levels stands at CA$6.5m to keep the business going. Additionally, KEL has generated cash from operations of CA$186m during the same period of time, resulting in an operating cash to total debt ratio of 75%, indicating that KEL’s operating cash is sufficient to cover its debt.
Can KEL meet its short-term obligations with the cash in hand?
With current liabilities at CA$85m, the company may not be able to easily meet these obligations given the level of current assets of CA$58m, with a current ratio of 0.68x. The current ratio is calculated by dividing current assets by current liabilities.
Is KEL’s debt level acceptable?
KEL’s level of debt is appropriate relative to its total equity, at 28%. KEL is not taking on too much debt commitment, which may be constraining for future growth. We can test if KEL’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For KEL, the ratio of 1.73x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
KEL’s debt level is appropriate for a company its size. Furthermore, it is able to generate sufficient cash flow coverage, meaning it is able to put its debt in good use. However, its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I’m sure KEL has company-specific issues impacting its capital structure decisions. I suggest you continue to research Kelt Exploration to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for KEL’s future growth? Take a look at our free research report of analyst consensus for KEL’s outlook.
- Valuation: What is KEL worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether KEL is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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