Are Ikkuma Resources Corp’s (CVE:IKM) Interest Costs Too High?

Ikkuma Resources Corp (CVE:IKM) is a small-cap stock with a market capitalization of CA$38.27m. 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? Oil and Gas companies, in particular ones that run negative earnings, are inclined towards being higher risk. So, understanding the company’s financial health becomes vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, I know these factors are very high-level, so I recommend you dig deeper yourself into IKM here.

Does IKM produce enough cash relative to debt?

IKM’s debt levels surged from CA$25.13m to CA$53.53m over the last 12 months , which comprises of short- and long-term debt. With this growth in debt, IKM currently has CA$0 remaining in cash and short-term investments , ready to deploy into the business. Moreover, IKM has generated cash from operations of CA$1.62m during the same period of time, leading to an operating cash to total debt ratio of 3.02%, meaning that IKM’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for loss making businesses since metrics such as return on asset (ROA) requires positive earnings. In IKM’s case, it is able to generate 0.03x cash from its debt capital.

Can IKM pay its short-term liabilities?

At the current liabilities level of CA$12.77m liabilities, the company has been able to meet these commitments with a current assets level of CA$15.93m, leading to a 1.25x current account ratio. For Oil and Gas companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

TSXV:IKM Historical Debt June 26th 18

Is IKM’s debt level acceptable?

With debt reaching 44.94% of equity, IKM 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. But since IKM is currently loss-making, sustainability of its current state of operations becomes a concern. 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:

At its current level of cash flow coverage, IKM has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for IKM’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Ikkuma Resources to get a better picture of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for IKM’s future growth? Take a look at our free research report of analyst consensus for IKM’s outlook.

2. Historical Performance: What has IKM’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 pass 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.