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Kforce Inc. (NASDAQ:KFRC) is a small-cap stock with a market capitalization of US$908m. 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 crucial, 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. However, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into KFRC here.
Does KFRC Produce Much Cash Relative To Its Debt?
KFRC has shrunk its total debt levels in the last twelve months, from US$119m to US$74m , which also accounts for long term debt. With this debt repayment, the current cash and short-term investment levels stands at US$112k to keep the business going. Moreover, KFRC has produced cash from operations of US$88m during the same period of time, resulting in an operating cash to total debt ratio of 118%, meaning that KFRC’s current level of operating cash is high enough to cover debt.
Does KFRC’s liquid assets cover its short-term commitments?
Looking at KFRC’s US$90m in current liabilities, the company has been able to meet these obligations given the level of current assets of US$248m, with a current ratio of 2.75x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Professional Services companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Is KFRC’s debt level acceptable?
With debt reaching 44% of equity, KFRC may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can test if KFRC’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 KFRC, the ratio of 18.22x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving KFRC ample headroom to grow its debt facilities.
KFRC’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. Keep in mind I haven't considered other factors such as how KFRC has been performing in the past. You should continue to research Kforce to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for KFRC’s future growth? Take a look at our free research report of analyst consensus for KFRC’s outlook.
- Valuation: What is KFRC 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 KFRC 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 email@example.com. 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.