Is Kellton Tech Solutions Limited's (NSE:KELLTONTEC) Balance Sheet A Threat To Its Future?

Investors are always looking for growth in small-cap stocks like Kellton Tech Solutions Limited (NSE:KELLTONTEC), with a market cap of ₹3.75b. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the IT industry, even ones that are profitable, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is crucial. I believe these basic checks tell most of the story you need to know. Nevertheless, this commentary is still very high-level, so I suggest you dig deeper yourself into KELLTONTEC here.

How does KELLTONTEC’s operating cash flow stack up against its debt?

Over the past year, KELLTONTEC has reduced its debt from ₹1.20b to ₹989.83m , which comprises of short- and long-term debt. With this debt repayment, KELLTONTEC's cash and short-term investments stands at ₹1.01b , 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. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of KELLTONTEC’s operating efficiency ratios such as ROA here.

Can KELLTONTEC pay its short-term liabilities?

Looking at KELLTONTEC’s most recent ₹2.24b liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.52x. Usually, for IT companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

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

KELLTONTEC’s level of debt is appropriate relative to its total equity, at 38.05%. KELLTONTEC is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether KELLTONTEC 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 KELLTONTEC's, case, the ratio of 7.11x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as KELLTONTEC’s high interest coverage is seen as responsible and safe practice.

Next Steps:

KELLTONTEC’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, 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 KELLTONTEC's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Kellton Tech Solutions to get a better picture of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for KELLTONTEC’s future growth? Take a look at our free research report of analyst consensus for KELLTONTEC’s outlook.
2. Historical Performance: What has KELLTONTEC'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.
3. 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 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.