KappAhl AB (publ) (STO:KAHL) is a small-cap stock with a market capitalization of kr1.3b. 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? Understanding the company’s financial health becomes essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We’ll look at some basic checks that can form a snapshot the company’s financial strength. However, potential investors would need to take a closer look, and I recommend you dig deeper yourself into KAHL here.
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KAHL’s Debt (And Cash Flows)
KAHL has built up its total debt levels in the last twelve months, from kr560m to kr686m – this includes long-term debt. With this rise in debt, KAHL’s cash and short-term investments stands at kr53m , ready to be used for running the business. Additionally, KAHL has produced cash from operations of kr224m in the last twelve months, resulting in an operating cash to total debt ratio of 33%, meaning that KAHL’s operating cash is sufficient to cover its debt.
Does KAHL’s liquid assets cover its short-term commitments?
With current liabilities at kr1.2b, it appears that the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.87x. The current ratio is the number you get when you divide current assets by current liabilities.
Does KAHL face the risk of succumbing to its debt-load?
With debt reaching 45% of equity, KAHL may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can check to see whether KAHL is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In KAHL’s, case, the ratio of 18.62x 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.
Next Steps:
Although KAHL’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. But, its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I’m sure KAHL has company-specific issues impacting its capital structure decisions. I suggest you continue to research KappAhl to get a more holistic view of the stock by looking at: