Kimball Electronics, Inc. (NASDAQ:KE) is a small-cap stock with a market capitalization of US$411m. 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? Assessing first and foremost the financial health is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company’s balance sheet strength. However, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into KE here.
Does KE Produce Much Cash Relative To Its Debt?
KE has built up its total debt levels in the last twelve months, from US$11m to US$89m . With this increase in debt, KE currently has US$36m remaining in cash and short-term investments , ready to be used for running the business. Additionally, KE has produced US$24m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 27%, signalling that KE’s operating cash is sufficient to cover its debt.
Can KE meet its short-term obligations with the cash in hand?
With current liabilities at US$321m, the company has been able to meet these commitments with a current assets level of US$500m, leading to a 1.56x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Electronic 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.
Does KE face the risk of succumbing to its debt-load?
KE’s level of debt is appropriate relative to its total equity, at 25%. KE is not taking on too much debt commitment, which may be constraining for future growth. 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 23.86x suggests that interest is comfortably 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.
KE has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for KE’s financial health. Other important fundamentals need to be considered alongside. You should 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.
- Historical Performance: What has KE’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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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