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Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Kingfisher plc (LON:KGF), with a market cap of UK£5.57b, often get neglected by retail investors. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. Today we will look at KGF’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into KGF here.
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Does KGF produce enough cash relative to debt?
KGF’s debt levels have fallen from UK£198.0m to UK£176.0m over the last 12 months , which comprises of short- and long-term debt. With this debt repayment, the current cash and short-term investment levels stands at UK£262.0m , ready to deploy into the business. On top of this, KGF has produced UK£293.0m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 166%, meaning that KGF’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In KGF’s case, it is able to generate 1.66x cash from its debt capital.
Does KGF’s liquid assets cover its short-term commitments?
At the current liabilities level of UK£3.05b liabilities, it seems that the business has been able to meet these commitments with a current assets level of UK£3.52b, leading to a 1.15x current account ratio. For Specialty Retail 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.
Can KGF service its debt comfortably?
With a debt-to-equity ratio of 2.6%, KGF’s debt level is relatively low. KGF is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if KGF’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 KGF, the ratio of 19.17x 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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KGF’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 proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how KGF has been performing in the past. I recommend you continue to research Kingfisher to get a better picture of the stock by looking at: