Are Kratos Defense & Security Solutions, Inc.’s (NASDAQ:KTOS) Interest Costs Too High?

While small-cap stocks, such as Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) with its market cap of US$1.4b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since KTOS is loss-making right now, it’s crucial to evaluate the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, since I only look at basic financial figures, I recommend you dig deeper yourself into KTOS here.

How does KTOS’s operating cash flow stack up against its debt?

Over the past year, KTOS has reduced its debt from US$370m to US$294m , which includes long-term debt. With this debt payback, KTOS currently has US$187m remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, 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 assess some of KTOS’s operating efficiency ratios such as ROA here.

Can KTOS meet its short-term obligations with the cash in hand?

At the current liabilities level of US$172m, it appears that the company has been able to meet these commitments with a current assets level of US$497m, leading to a 2.89x current account ratio. Usually, for Aerospace & Defense companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

NasdaqGS:KTOS Historical Debt January 1st 19
NasdaqGS:KTOS Historical Debt January 1st 19

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

KTOS is a relatively highly levered company with a debt-to-equity of 57%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since KTOS is currently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.

Next Steps:

Although KTOS’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around KTOS’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure KTOS has company-specific issues impacting its capital structure decisions. You should continue to research Kratos Defense & Security Solutions to get a more holistic view of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for KTOS’s future growth? Take a look at our free research report of analyst consensus for KTOS’s outlook.
  2. Valuation: What is KTOS 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 KTOS is currently mispriced by the market.
  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.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.