Is Korab Resources Limited’s (ASX:KOR) Balance Sheet A Threat To Its Future?

More

Unxpected adverse events, such as natural disasters and wars, can be a true test of a company’s capacity to meet its obligations. Furthermore, failure to service debt can hurt its reputation, making funding expensive in the future. Can KOR pay off what it owes to its debtholder by using only cash from its operational activities? Last year, KOR’s operating cash flow was -0.29x its current debt. This means what KOR can generate on an annual basis, which is currently a negative value, does not cover what it actually owes its debtors in the near term. This raises a red flag, looking at KOR’s operations at this point in time.

Does KOR’s liquid assets cover its short-term commitments?

What about its commitments to other stakeholders such as payments to suppliers and employees? In times of adverse events, KOR may need to liquidate its short-term assets to pay these immediate obligations. We test for KOR’s ability to meet these needs by comparing its cash and short-term investments with current liabilities. Our analysis shows that KOR is able to meet its upcoming commitments with its cash and other short-term assets, which lessens our concerns for the company’s business operations should any unfavourable circumstances arise.

Can KOR service its debt comfortably?

While ideally the debt-to equity ratio of a financially healthy company should be less than 40%, several factors such as industry life-cycle and economic conditions can result in a company raising a significant amount of debt. For KOR, the debt-to-equity ratio is 64.93%, which means, while the company’s debt could pose a problem for its earnings stability, it is not at an alarmingly high level yet. While debt-to-equity ratio has several factors at play, an easier way to check whether KOR’s leverage is at a sustainable level is to check its ability to service the debt. A company generating earnings at least three times its interest payments is considered financially sound. KOR’s interest on debt is not strongly covered by earnings as it sits at around 1.83x. Debtors may be less inclined to loan the company more money, giving KOR less headroom for growth through debt.

Next Steps:

Are you a shareholder? KOR’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Furthermore, the company may struggle to meet its near term liabilities should an adverse event occur. Given that KOR’s financial situation may change. You should always be researching market expectations for KOR’s future growth on our free analysis platform.