KSB SE & Co KGaA (DB:KSB) is a small-cap stock with a market capitalization of €797.72M. 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. I believe these basic checks tell most of the story you need to know. Though, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into KSB here.

Does KSB generate an acceptable amount of cash through operations?

Over the past year, KSB has maintained its debt levels at around €177.85M comprising of short- and long-term debt. At this constant level of debt, KSB currently has €288.88M remaining in cash and short-term investments , ready to deploy into the business. On top of this, KSB has produced cash from operations of €134.50M over the same time period, leading to an operating cash to total debt ratio of 75.63%, meaning that KSB’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In KSB’s case, it is able to generate 0.76x cash from its debt capital.

Does KSB’s liquid assets cover its short-term commitments?

At the current liabilities level of €782.62M 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 2.04x. Usually, for Machinery companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.

Is KSB’s debt level acceptable?

With debt at 20.08% of equity, KSB may be thought of as appropriately levered. This range is considered safe as KSB is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether KSB 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 KSB’s, case, the ratio of 41.01x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving KSB ample headroom to grow its debt facilities.

Next Steps:

KSB’s high cash coverage and appropriate 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. Keep in mind I haven’t considered other factors such as how KSB has been performing in the past. I recommend you continue to research KSB SE KGaA to get a better picture of the stock by looking at: