What Investors Should Know About Kennametal Inc’s (NYSE:KMT) Financial Strength
Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Kennametal Inc (NYSE:KMT), with a market cap of US$3.5b, often get neglected by retail investors. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. Let’s take a look at KMT’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Don’t forget that this is a general and concentrated examination of Kennametal’s financial health, so you should conduct further analysis into KMT here.
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How much cash does KMT generate through its operations?
KMT’s debt levels surged from US$696m to US$992m over the last 12 months , which is made up of current and long term debt. With this growth in debt, KMT’s cash and short-term investments stands at US$556m for investing into the business. Additionally, KMT has generated US$277m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 28%, indicating that KMT’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In KMT’s case, it is able to generate 0.28x cash from its debt capital.
Does KMT’s liquid assets cover its short-term commitments?
Looking at KMT’s most recent US$887m liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$1.5b, leading to a 1.74x current account ratio. For Machinery companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Does KMT face the risk of succumbing to its debt-load?
With debt reaching 81% of equity, KMT may be thought of as relatively highly levered. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. 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 after interest and tax at least three times its net interest payments is considered financially sound. In KMT’s case, the ratio of 10.75x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as KMT’s high interest coverage is seen as responsible and safe practice.
Next Steps:
Although KMT’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. 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 KMT has company-specific issues impacting its capital structure decisions. I suggest you continue to research Kennametal to get a more holistic view of the mid-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for KMT’s future growth? Take a look at our free research report of analyst consensus for KMT’s outlook.
Valuation: What is KMT 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 KMT 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.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
