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While small-cap stocks, such as Kelly Partners Group Holdings Limited (ASX:KPG) with its market cap of AU$65.06M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that KPG is not presently profitable, it’s vital to evaluate the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. Nevertheless, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into KPG here.
Does KPG generate an acceptable amount of cash through operations?
Over the past year, KPG has ramped up its debt from AU$13.27M to AU$14.96M – this includes both the current and long-term debt. With this increase in debt, the current cash and short-term investment levels stands at AU$3.21M , ready to deploy into the business. Moreover, KPG has produced cash from operations of AU$6.92M over the same time period, leading to an operating cash to total debt ratio of 46.26%, signalling that KPG’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires a positive net income. In KPG’s case, it is able to generate 0.46x cash from its debt capital.
Can KPG meet its short-term obligations with the cash in hand?
With current liabilities at AU$10.21M, it seems that the business has been able to meet these obligations given the level of current assets of AU$11.73M, with a current ratio of 1.15x. Generally, for Professional Services companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does KPG face the risk of succumbing to its debt-load?
With debt reaching 69.20% of equity, KPG may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since KPG is currently 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.
Next Steps:
KPG’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for KPG’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Kelly Partners Group Holdings to get a better picture of the small-cap by looking at: