KalVista Pharmaceuticals Inc (NASDAQ:KALV) is a small-cap stock with a market capitalization of USD $99.96M. 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. The significance of doing due diligence on a company’s financial strength stems from the fact that over 20,000 companies go bankrupt in every quarter in the US alone. 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. Check out our latest analysis for KalVista Pharmaceuticals
How does KALV’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 catastrophes does not mean the company can stop servicing its debt obligations. 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. In the case of KALV, operating cash flow turned out to be -54.26x its debt level over the past twelve months. This means what KALV 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 KALV’s operations at this point in time.
Can KALV pay its short-term liabilities?
What about its commitments to other stakeholders such as payments to suppliers and employees? In times of adverse events, KALV may need to liquidate its short-term assets to pay these immediate obligations. We test for KALV’s ability to meet these needs by comparing its cash and short-term investments with current liabilities. Our analysis shows that KALV does have enough liquid assets on hand to meet its upcoming liabilities, which lowers our concerns should adverse events arise.
Does KALV face the risk of succumbing to its debt-load?
Debt-to-equity ratio tells us how much of the asset debtors could claim if the company went out of business. For KALV, the debt-to-equity ratio is 1.55%, which means debt is low and does not pose any significant threat to the company’s operations. While debt-to-equity ratio has several factors at play, an easier way to check whether KALV’s leverage is at a sustainable level is to check its ability to service the debt. A company generating earnings at least three times its interest payments is considered financially sound. KALV’s interest on debt is sufficiently covered by earnings as it sits at around 678x. This means lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Are you a shareholder? KALV’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Given that its financial position may change. You should always be keeping on top of market expectations for KALV’s future growth on our free analysis platform.
Are you a potential investor? KalVista Pharmaceuticals currently has financial flexibility to ramp up growth in the future. Moreover, 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 the company’s track record. As a following step, you should take a look at KALV’s past performance analysis on our free platform to figure out KALV’s financial health position.
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.