While small-cap stocks, such as Krynicki Recykling Spólka Akcyjna (WSE:KRC) with its market cap of ZŁ106.63M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into KRC here.
Does KRC generate enough cash through operations?
KRC’s debt levels have fallen from ZŁ62.35M to ZŁ56.93M over the last 12 months , which comprises of short- and long-term debt. With this debt repayment, KRC currently has ZŁ131.26K remaining in cash and short-term investments , ready to deploy into the business. On top of this, KRC has produced ZŁ19.78M in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 34.74%, indicating that KRC’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In KRC’s case, it is able to generate 0.35x cash from its debt capital.
Can KRC pay its short-term liabilities?
Looking at KRC’s most recent ZŁ33.64M liabilities, it seems that the business is not able to meet these obligations given the level of current assets of ZŁ15.13M, with a current ratio of 0.45x below the prudent level of 3x.
Does KRC face the risk of succumbing to its debt-load?
KRC is a relatively highly levered company with a debt-to-equity of 76.61%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In KRC’s case, the ratio of 5.87x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Although KRC’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. Though its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for KRC’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Krynicki Recykling Spólka Akcyjna to get a more holistic view of the stock by looking at:
- Valuation: What is KRC 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 KRC is currently mispriced by the market.
- Historical Performance: What has KRC’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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.
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.