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While small-cap stocks, such as Korian (EPA:KORI) with its market cap of €2.8b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. 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. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, this is just a partial view of the stock, and I recommend you dig deeper yourself into KORI here.
KORI’s Debt (And Cash Flows)
Over the past year, KORI has ramped up its debt from €2.9b to €3.3b , which accounts for long term debt. With this growth in debt, the current cash and short-term investment levels stands at €552m , ready to be used for running the business. Additionally, KORI has produced €377m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 11%, signalling that KORI’s current level of operating cash is not high enough to cover debt.
Does KORI’s liquid assets cover its short-term commitments?
Looking at KORI’s €1.4b in current liabilities, it seems that the business arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.72x. The current ratio is calculated by dividing current assets by current liabilities.
Can KORI service its debt comfortably?
With total debt exceeding equity, KORI is considered a highly levered company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether KORI 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 KORI's, case, the ratio of 3.04x 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.
Although KORI’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven't considered other factors such as how KORI has been performing in the past. I suggest you continue to research Korian to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for KORI’s future growth? Take a look at our free research report of analyst consensus for KORI’s outlook.
- Valuation: What is KORI 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 KORI 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.