Is KalNorth Gold Mines Limited (ASX:KGM) A Financially Sound Company?

Investors are always looking for growth in small-cap stocks like KalNorth Gold Mines Limited (ASX:KGM), with a market cap of AU$8.94M. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company's financial health becomes crucial, 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. Nevertheless, I know these factors are very high-level, so I suggest you dig deeper yourself into KGM here.

Does KGM generate an acceptable amount of cash through operations?

KGM's debt levels surged from AU$320.05K to AU$1.37M over the last 12 months made up of predominantly near term debt. With this growth in debt, KGM currently has AU$3.26M remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn't be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can examine some of KGM’s operating efficiency ratios such as ROA here.

Can KGM pay its short-term liabilities?

With current liabilities at AU$1.82M, it appears that the company has been able to meet these obligations given the level of current assets of AU$3.27M, with a current ratio of 1.8x. Generally, for Metals and Mining companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Does KGM face the risk of succumbing to its debt-load?

With debt at 27.12% of equity, KGM may be thought of as appropriately levered. This range is considered safe as KGM is not taking on too much debt obligation, which may be constraining for future growth.

Next Steps:

KGM’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. Keep in mind I haven't considered other factors such as how KGM has been performing in the past. You should continue to research KalNorth Gold Mines to get a more holistic view of the stock by looking at:

1. Historical Performance: What has KGM'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.
2. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.