Kordellos Ch Bros S.A. (ATSE:KORDE) is a small-cap stock with a market capitalization of €9.76M. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Evaluating financial health as part of your investment thesis is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into KORDE here.
How does KORDE’s operating cash flow stack up against its debt?
Over the past year, KORDE has ramped up its debt from €30.31M to €32.13M , which is made up of current and long term debt. With this rise in debt, KORDE’s cash and short-term investments stands at €3.97M , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of KORDE’s operating efficiency ratios such as ROA here.
Can KORDE pay its short-term liabilities?
With current liabilities at €26.72M, the company has been able to meet these obligations given the level of current assets of €33.61M, with a current ratio of 1.26x. Usually, for Metals and Mining companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can KORDE service its debt comfortably?
KORDE is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether KORDE is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In KORDE’s, case, the ratio of 1.9x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.Next Steps:
At its current level of cash flow coverage, KORDE has room for improvement to better cushion for events which may require debt repayment. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for KORDE’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Kordellos Ch. Bros to get a more holistic view of the stock by looking at:
- 1. Historical Performance: What has KORDE’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.