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Investors are always looking for growth in small-cap stocks like Kinder Morgan Canada Limited (TSE:KML), with a market cap of CA$522m. However, an important fact which most ignore is: how financially healthy is the business? Given that KML is not presently profitable, it’s essential to evaluate the current state of its operations and pathway to profitability. We’ll look at some basic checks that can form a snapshot the company’s financial strength. However, this is not a comprehensive overview, so I suggest you dig deeper yourself into KML here.
Does KML Produce Much Cash Relative To Its Debt?
Over the past year, KML has ramped up its debt from CA$100m to CA$564m , which includes long-term debt. With this increase in debt, KML currently has CA$47m remaining in cash and short-term investments , ready to be used for running the business. We note it produced negative cash flow over the last twelve months. For this article’s sake, I won’t be looking at this today, but you can assess some of KML’s operating efficiency ratios such as ROA here.
Can KML pay its short-term liabilities?
With current liabilities at CA$129m, the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.76x. The current ratio is calculated by dividing current assets by current liabilities.
Is KML’s debt level acceptable?
With debt reaching 63% of equity, KML may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. Though, since KML is presently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Although KML’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. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I’m sure KML has company-specific issues impacting its capital structure decisions. I suggest you continue to research Kinder Morgan Canada to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for KML’s future growth? Take a look at our free research report of analyst consensus for KML’s outlook.
- Valuation: What is KML 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 KML 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.
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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.