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Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS), with a market cap of US$2.4b, are often out of the spotlight. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. KTOS’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into KTOS here.
Does KTOS Produce Much Cash Relative To Its Debt?
KTOS has built up its total debt levels in the last twelve months, from US$294m to US$339m , which includes long-term debt. With this rise in debt, KTOS’s cash and short-term investments stands at US$178m , ready to be used for running the business. Moreover, KTOS has produced cash from operations of US$23m during the same period of time, leading to an operating cash to total debt ratio of 6.9%, indicating that KTOS’s current level of operating cash is not high enough to cover debt.
Can KTOS meet its short-term obligations with the cash in hand?
With current liabilities at US$195m, it seems that the business has been able to meet these commitments with a current assets level of US$517m, leading to a 2.65x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. For Aerospace & Defense companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is KTOS’s debt level acceptable?
With a debt-to-equity ratio of 52%, KTOS can be considered as an above-average leveraged company. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if KTOS’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 KTOS, the ratio of 1.72x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
KTOS’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. 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. I suggest you continue to research Kratos Defense & Security Solutions to get a more holistic view of the mid-cap by looking at:
- 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.
- 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.
- 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.