While small-cap stocks, such as Kelt Exploration Ltd (TSE:KEL) with its market cap of CA$1.3b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Oil and Gas companies, in particular ones that run negative earnings, are more likely to be higher risk. Assessing first and foremost the financial health is crucial. Here are few basic financial health checks you should consider before taking the plunge. However, this commentary is still very high-level, so I recommend you dig deeper yourself into KEL here.
Does KEL produce enough cash relative to debt?
Over the past year, KEL has ramped up its debt from CA$137m to CA$183m – this includes both the current and long-term debt. With this increase in debt, the current cash and short-term investment levels stands at CA$29k , ready to deploy into the business. On top of this, KEL has produced CA$154m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 84%, indicating that KEL’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for unprofitable companies as traditional metrics such as return on asset (ROA) requires positive earnings. In KEL’s case, it is able to generate 0.84x cash from its debt capital.
Does KEL’s liquid assets cover its short-term commitments?
At the current liabilities level of CA$88m liabilities, the company may not be able to easily meet these obligations given the level of current assets of CA$38m, with a current ratio of 0.43x.
Can KEL service its debt comfortably?
With debt at 21% of equity, KEL may be thought of as appropriately levered. This range is considered safe as KEL is not taking on too much debt obligation, which may be constraining for future growth. KEL’s risk around capital structure is low, and the company has the headroom and ability to raise debt should it need to in the future.
KEL’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven’t considered other factors such as how KEL has been performing in the past. I suggest you continue to research Kelt Exploration to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for KEL’s future growth? Take a look at our free research report of analyst consensus for KEL’s outlook.
- Valuation: What is KEL 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 KEL 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.
To help readers see past 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. For errors that warrant correction please contact the editor at email@example.com.