Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
While small-cap stocks, such as Kelly Partners Group Holdings Limited (ASX:KPG) with its market cap of AU$33m, 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 crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company’s balance sheet strength. Nevertheless, potential investors would need to take a closer look, and I suggest you dig deeper yourself into KPG here.
Does KPG Produce Much Cash Relative To Its Debt?
Over the past year, KPG has ramped up its debt from AU$14m to AU$19m , which accounts for long term debt. With this growth in debt, the current cash and short-term investment levels stands at AU$3.5m , ready to be used for running the business. Moreover, KPG has produced cash from operations of AU$8.9m over the same time period, leading to an operating cash to total debt ratio of 47%, indicating that KPG’s current level of operating cash is high enough to cover debt.
Can KPG meet its short-term obligations with the cash in hand?
At the current liabilities level of AU$11m, it seems that the business has been able to meet these obligations given the level of current assets of AU$13m, with a current ratio of 1.23x. The current ratio is the number you get when you divide current assets by current liabilities. For Professional Services companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is KPG’s debt level acceptable?
With a debt-to-equity ratio of 83%, KPG can be considered as an above-average leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can test if KPG’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 KPG, the ratio of 17.23x suggests that interest is comfortably covered, which means that lenders may be willing to lend out more funding as KPG’s high interest coverage is seen as responsible and safe practice.
Although KPG’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how KPG has been performing in the past. You should continue to research Kelly Partners Group Holdings to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for KPG’s future growth? Take a look at our free research report of analyst consensus for KPG’s outlook.
- Valuation: What is KPG 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 KPG 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.