While small-cap stocks, such as Kirby Corporation (NYSE:KEX) with its market cap of US$4.8b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. 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. The following basic checks can help you get a picture of the company’s balance sheet strength. Nevertheless, potential investors would need to take a closer look, and I recommend you dig deeper yourself into KEX here.
KEX’s Debt (And Cash Flows)
Over the past year, KEX has ramped up its debt from US$992m to US$1.4b , which includes long-term debt. With this increase in debt, the current cash and short-term investment levels stands at US$7.8m , ready to be used for running the business. Moreover, KEX has generated cash from operations of US$347m during the same period of time, resulting in an operating cash to total debt ratio of 25%, meaning that KEX’s debt is appropriately covered by operating cash.
Can KEX pay its short-term liabilities?
Looking at KEX’s US$608m in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$1.1b, with a current ratio of 1.8x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Shipping companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is KEX’s debt level acceptable?
KEX is a relatively highly levered company with a debt-to-equity of 44%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In KEX’s case, the ratio of 5.37x 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.
KEX’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 KEX has company-specific issues impacting its capital structure decisions. I recommend you continue to research Kirby to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for KEX’s future growth? Take a look at our free research report of analyst consensus for KEX’s outlook.
- Valuation: What is KEX 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 KEX 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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