Yahoo Finance Is The Keg Royalties Income Fund’s (TSE:KEG.UN) Balance Sheet A Threat To Its Future?
The Keg Royalties Income Fund (TSX:KEG.UN) is a small-cap stock with a market capitalization of CA$204.70M. 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? Assessing first and foremost the financial health is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into KEG.UN here.
How does KEG.UN’s operating cash flow stack up against its debt?
KEG.UN’s debt level has been constant at around CA$13.95M over the previous year – this includes both the current and long-term debt. At this constant level of debt, the current cash and short-term investment levels stands at CA$2.49M , ready to deploy into the business. Additionally, KEG.UN has produced cash from operations of CA$23.73M during the same period of time, leading to an operating cash to total debt ratio of 170.12%, indicating that KEG.UN’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In KEG.UN’s case, it is able to generate 1.7x cash from its debt capital.
Can KEG.UN meet its short-term obligations with the cash in hand?
At the current liabilities level of CA$3.00M liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.91x. Usually, for Hospitality companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can KEG.UN service its debt comfortably?
With a debt-to-equity ratio of 15.55%, KEG.UN’s debt level may be seen as prudent. KEG.UN is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if KEG.UN’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For KEG.UN, the ratio of 2.67x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
Next Steps:
KEG.UN’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for KEG.UN’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Keg Royalties Income Fund to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for KEG.UN’s future growth? Take a look at our free research report of analyst consensus for KEG.UN’s outlook.
Valuation: What is KEG.UN worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether KEG.UN is currently mispriced by the market.
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.
