Are KalNorth Gold Mines Limited’s (ASX:KGM) Interest Costs Too High?
KalNorth Gold Mines Limited (ASX:KGM) is a small-cap stock with a market capitalization of AUD A$7.15M. 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. Here are few basic financial health checks to judge whether a company fits the bill or there is an additional risk which you should consider before taking the plunge. View our latest analysis for KalNorth Gold Mines
Does KGM generate enough cash through operations?
There are many headwinds that come unannounced, such as natural disasters and political turmoil, which can challenge a small business and its ability to adapt and recover. These adverse events bring devastation and yet does not absolve the company from its debt. We can test the impact of these adverse events by looking at whether cash from its current operations can pay back its current debt obligations. In the case of KGM, operating cash flow turned out to be -0.35x its debt level over the past twelve months. This means what KGM can generate on an annual basis, which is currently a negative value, does not cover what it actually owes its debtors in the near term. This raises a red flag, looking at KGM’s operations at this point in time.
Can KGM meet its short-term obligations with the cash in hand?
What about its other commitments such as payments to suppliers and salaries to its employees? As cash flow from operation is hindered by adverse events, KGM may need to liquidate its short-term assets to meet these upcoming payments. We should examine if the company’s cash and short-term investment levels match its current liabilities. Our analysis shows that KGM does have enough liquid assets on hand to meet its upcoming liabilities, which lowers our concerns should adverse events arise.
Can KGM service its debt comfortably?
While ideally the debt-to equity ratio of a financially healthy company should be less than 40%, several factors such as industry life-cycle and economic conditions can result in a company raising a significant amount of debt. For KGM, the debt-to-equity ratio is 24.85%, which means its debt level does not pose a threat to its operations right now.
Next Steps:
Are you a shareholder? Although KGM’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Given that its financial position may be different. I suggest researching market expectations for KGM’s future growth on our free analysis platform.
Are you a potential investor? KGM’s low-debt position gives it headroom for future growth funding in the future. In addition, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. To gain more confidence in the stock, you need to also analyse KGM’s track record. You should continue your analysis by taking a look at KGM’s past performance analysis on our free platform in order to determine for yourself whether its debt position is justified.
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.
