Investors are always looking for growth in small-cap stocks like Knoll, Inc. (NYSE:KNL), with a market cap of US$925m. However, an important fact which most ignore is: how financially healthy is the business? Understanding the company’s financial health becomes vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Let’s work through some financial health checks you may wish to consider if you’re interested in this stock. Nevertheless, these checks don’t give you a full picture, so I recommend you dig deeper yourself into KNL here.
Does KNL Produce Much Cash Relative To Its Debt?
KNL’s debt levels surged from US$191m to US$463m over the last 12 months , which includes long-term debt. With this increase in debt, the current cash and short-term investment levels stands at US$1.6m to keep the business going. Moreover, KNL has generated US$108m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 23%, indicating that KNL’s operating cash is sufficient to cover its debt.
Can KNL pay its short-term liabilities?
Looking at KNL’s US$273m in current 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 1.22x. The current ratio is calculated by dividing current assets by current liabilities. For Commercial Services companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Is KNL’s debt level acceptable?
KNL is a highly-leveraged company with debt exceeding equity by over 100%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether KNL 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 KNL’s, case, the ratio of 6.2x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
KNL’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure KNL has company-specific issues impacting its capital structure decisions. I recommend you continue to research Knoll to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for KNL’s future growth? Take a look at our free research report of analyst consensus for KNL’s outlook.
- Valuation: What is KNL 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 KNL 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.
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