What Investors Should Know About Kingsgate Consolidated Limited's (ASX:KCN) Financial Strength

Kingsgate Consolidated Limited (ASX:KCN) is a small-cap stock with a market capitalization of A$91.67M. 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? Evaluating financial health as part of your investment thesis 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. Nevertheless, I know these factors are very high-level, so I recommend you dig deeper yourself into KCN here.

Does KCN generate an acceptable amount of cash through operations?

KCN's debt levels have fallen from A$98.1M to A$11.6M 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 A$22.0M , ready to deploy into the business. Moreover, KCN has produced A$57.0M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 492.20%, meaning that KCN’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 KCN’s case, it is able to generate 4.92x cash from its debt capital.

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

Looking at KCN’s most recent A$5.3M liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 5.34x. However, anything above 3x is considered high and could mean that KCN has too much idle capital in low-earning investments.

Does KCN face the risk of succumbing to its debt-load?

With a debt-to-equity ratio of 11.47%, KCN's debt level may be seen as prudent. This range is considered safe as KCN is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether KCN 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 KCN's, case, the ratio of 4.56x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as KCN’s high interest coverage is seen as responsible and safe practice.

Next Steps:

KCN’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 will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for KCN's financial health. Other important fundamentals need to be considered alongside. You should continue to research Kingsgate Consolidated to get a more holistic view of the stock by looking at:

1. Valuation: What is KCN 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 KCN is currently mispriced by the market.

2. Historical Performance: What has KCN's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.

3. 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.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.