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Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Korn Ferry (NYSE:KFY), with a market cap of US$2.8b, often get neglected by retail investors. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. Let’s take a look at KFY’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into KFY here.
How does KFY’s operating cash flow stack up against its debt?
KFY’s debt levels have fallen from US$246m to US$225m over the last 12 months – this includes long-term debt. With this debt repayment, the current cash and short-term investment levels stands at US$388m , ready to deploy into the business. On top of this, KFY has generated cash from operations of US$243m over the same time period, resulting in an operating cash to total debt ratio of 108%, signalling that KFY’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 KFY’s case, it is able to generate 1.08x cash from its debt capital.
Does KFY’s liquid assets cover its short-term commitments?
With current liabilities at US$466m, the company has been able to meet these commitments with a current assets level of US$932m, leading to a 2x current account ratio. Usually, for Professional Services 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.
Is KFY’s debt level acceptable?
With a debt-to-equity ratio of 19%, KFY’s debt level may be seen as prudent. KFY is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if KFY’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 KFY, the ratio of 22.61x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as KFY’s high interest coverage is seen as responsible and safe practice.
KFY has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. 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 KFY has been performing in the past. I suggest you continue to research Korn Ferry to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for KFY’s future growth? Take a look at our free research report of analyst consensus for KFY’s outlook.
- Valuation: What is KFY 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 KFY 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 firstname.lastname@example.org. 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.