Investors are always looking for growth in small-cap stocks like Kidman Resources Limited (ASX:KDR), with a market cap of $248.18M. However, an important fact which most ignore is: how financially healthy is the company? 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. Thus, it becomes utmost important for an investor to test a company’s resilience for such contingencies. In simple terms, I believe these three small calculations tell most of the story you need to know. Check out our latest analysis for Kidman Resources
How does KDR’s operating cash flow stack up against its debt?
There are many headwinds that come unannounced. For example, in 2011, an earthquake in Japan wiped out a significant chunk of its auto supply chain sector. If these companies had not been well-established with plenty of cash cushion, it would be near impossible to recover damages.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 natural catastrophes by looking at how much cash it generates from its current operations. Last year, KDR’s operating cash flow was -0.78x its current debt. This means what KDR 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 KDR’s operations at this point in time.
Can KDR meet its short-term obligations with the cash in hand?
In addition to debtholders, a company must be able to pay its bills and salaries to keep the business running. During times of unfavourable events, KDR could be required to liquidate some of its assets to meet these upcoming payments, as cash flow from operations is hindered. We test for KDR’s ability to meet these needs by comparing its cash and short-term investments with current liabilities. Our analysis shows that KDR does have enough liquid assets on hand to meet its upcoming liabilities, which lowers our concerns should adverse events arise.
Can KDR 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 KDR, the debt-to-equity ratio is 39.55%, which means its debt level does not pose a threat to its operations right now.
Although KDR’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. Now that you know to keep debt in mind when putting together your investment thesis, I recommend you check out our latest free analysis report on Kidman Resources to see what other factors for KDR you should consider.
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