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Investors are always looking for growth in small-cap stocks like Kaufman & Broad SA (EPA:KOF), with a market cap of €870.8m. However, an important fact which most ignore is: how financially healthy is the business? Consumer Durables businesses operating in the environment facing headwinds from current disruption, even ones that are profitable, are inclined towards being higher risk. So, understanding the company’s financial health becomes vital. Here are few basic financial health checks you should consider before taking the plunge. Though, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into KOF here.
Does KOF produce enough cash relative to debt?
KOF has sustained its debt level by about €252.9m over the last 12 months made up of current and long term debt. At this current level of debt, the current cash and short-term investment levels stands at €289.7m for investing into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can take a look at some of KOF’s operating efficiency ratios such as ROA here.
Does KOF’s liquid assets cover its short-term commitments?
With current liabilities at €775.6m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.55x. For Consumer Durables companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is KOF’s debt level acceptable?
Since total debt levels have outpaced equities, KOF is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In KOF’s case, the ratio of 36.02x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
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KOF’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how KOF has been performing in the past. I suggest you continue to research Kaufman & Broad to get a better picture of the stock by looking at: