Keras Resources Plc (AIM:KRS) is a small-cap stock with a market capitalization of ￡8.03M. 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? Given that KRS is not presently profitable, it’s vital to assess the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into KRS here.

Does KRS generate an acceptable amount of cash through operations?

KRS’s debt levels surged from ￡0.4M to ￡1.1M over the last 12 months , which is mainly comprised of near term debt. With this increase in debt, the current cash and short-term investment levels stands at ￡0.1M , ready to deploy into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. 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 KRS’s operating efficiency ratios such as ROA here.

Can KRS pay its short-term liabilities?

Looking at KRS’s most recent ￡2.7M liabilities, the company has not been able to meet these commitments with a current assets level of ￡0.9M, leading to a 0.34x current account ratio. which is under the appropriate industry ratio of 3x.

Is KRS’s debt level acceptable?

With total debt exceeding equities, KRS is considered a highly levered company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since KRS is presently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.

Next Steps:

With a high level of debt on its balance sheet, KRS could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for KRS to increase its operational efficiency. In addition to this, the company may struggle to meet its near term liabilities should an adverse event occur. This is only a rough assessment of financial health, and I’m sure KRS has company-specific issues impacting its capital structure decisions. I recommend you continue to research Keras Resources to get a more holistic view of the stock by looking at: