How Financially Strong Is Karelian Diamond Resources PLC (AIM:KDR)?

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Unxpected adverse events, such as natural disasters and wars, can be a true test of a company’s capacity to meet its obligations. These adverse events bring devastation and yet does not absolve the company from its debt. Can KDR pay off what it owes to its debtholder by using only cash from its operational activities? KDR’s recent operating cash flow exceeded its debt obligations within the past year, which means KDR generates enough money in a year through its operations to pay off its near-term debt. Hence, debt poses a virtually insignificant risk for the company. This reflects proper cash and debt management by the company – great news for both debtholders and shareholders.

Can KDR pay its short-term liabilities?

What about its other commitments such as payments to suppliers and salaries to its employees? As cash flow from operation is hindered by adverse events, KDR may need to liquidate its short-term assets to meet these upcoming payments. We test for KDR’s ability to meet these needs by comparing its cash and short-term investments with current liabilities. Our analysis shows that KDR is unable to meet all of its upcoming commitments with its cash and other short-term assets. While this is not abnormal for companies, as their cash is better invested in the business or returned to investors than lying around, it does bring about some concerns should any unfavourable circumstances arise.

Can KDR service its debt comfortably?

Debt-to-equity ratio tells us how much of the asset debtors could claim if the company went out of business. For KDR, the debt-to-equity ratio is 3.70%, which indicates that the company faces low risk associated with debt. We can test if KDR’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings should cover interest by at least three times, therefore reducing concerns when profit is highly volatile. KDR’s interest on debt is sufficiently covered by earnings as it sits at around 6488.51x. Lenders may be less hesitant to lend out more funding as KDR’s high interest coverage is seen as responsible and safe practice.

Next Steps:

Are you a shareholder? KDR has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. But, as shareholders, you should try and determine whether this level of debt is justified for KDR, especially when liquidity may also be an issue. I recommend taking a look at KDR’s future growth analysis on our free platform. to properly assess the company’s position in further detail.