Kimball Electronics Inc (NASDAQ:KE) is a small-cap stock with a market capitalization of US$453m. 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? Companies operating in the Electronic industry, even ones that are profitable, are more likely to be higher risk. So, understanding the company’s financial health becomes crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into KE here.
How much cash does KE generate through its operations?
Over the past year, KE has ramped up its debt from US$14m to US$59m , which is mainly comprised of near term debt. With this rise in debt, KE currently has US$75m remaining in cash and short-term investments , ready to deploy into the business. On top of this, KE has produced cash from operations of US$30m over the same time period, leading to an operating cash to total debt ratio of 51%, meaning that KE’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In KE’s case, it is able to generate 0.51x cash from its debt capital.
Can KE pay its short-term liabilities?
Looking at KE’s US$280m in current liabilities, the company has been able to meet these obligations given the level of current assets of US$492m, with a current ratio of 1.76x. Generally, for Electronic companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Is KE’s debt level acceptable?
KE’s level of debt is appropriate relative to its total equity, at 17%. This range is considered safe as KE is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether KE 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 KE’s, case, the ratio of 56.27x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving KE ample headroom to grow its debt facilities.
KE 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 proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for KE’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Kimball Electronics to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for KE’s future growth? Take a look at our free research report of analyst consensus for KE’s outlook.
- Valuation: What is KE 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 KE 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.
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.
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