Investors are always looking for growth in small-cap stocks like KEMET Corporation (NYSE:KEM), with a market cap of US$1.16B. However, an important fact which most ignore is: how financially healthy is the business? Electronic companies, 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. However, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into KEM here.
Does KEM generate an acceptable amount of cash through operations?
KEM has sustained its debt level by about US$388.21M over the last 12 months comprising of short- and long-term debt. At this stable level of debt, KEM’s cash and short-term investments stands at US$109.77M , ready to deploy into the business. Additionally, KEM has generated cash from operations of US$71.67M in the last twelve months, leading to an operating cash to total debt ratio of 18.46%, meaning that KEM’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In KEM’s case, it is able to generate 0.18x cash from its debt capital.
Can KEM meet its short-term obligations with the cash in hand?
At the current liabilities level of US$130.14M liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.91x. For Electronic companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can KEM service its debt comfortably?
With debt reaching 74.92% of equity, KEM may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether KEM 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 KEM’s, case, the ratio of 3.22x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as KEM’s high interest coverage is seen as responsible and safe practice.
At its current level of cash flow coverage, KEM has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how KEM has been performing in the past. I recommend you continue to research KEMET to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for KEM’s future growth? Take a look at our free research report of analyst consensus for KEM’s outlook.
- Valuation: What is KEM 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 KEM 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 pass 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.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.