Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Kansas City Southern (NYSE:KSU), with a market capitalization of US$9.9b, rarely draw their attention from the investing community. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. Today we will look at KSU’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into KSU here.
How does KSU’s operating cash flow stack up against its debt?
KSU has sustained its debt level by about US$2.7b over the last 12 months – this includes long-term debt. At this current level of debt, KSU’s cash and short-term investments stands at US$107m for investing into the business. Additionally, KSU has produced US$1.0b in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 37%, meaning that KSU’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In KSU’s case, it is able to generate 0.37x cash from its debt capital.
Can KSU pay its short-term liabilities?
With current liabilities at US$466m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.32x. Usually, for Transportation companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does KSU face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 53%, KSU can be considered as an above-average leveraged company. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether KSU 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 KSU’s, case, the ratio of 8.97x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as KSU’s high interest coverage is seen as responsible and safe practice.
Although KSU’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. Keep in mind I haven’t considered other factors such as how KSU has been performing in the past. You should continue to research Kansas City Southern to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for KSU’s future growth? Take a look at our free research report of analyst consensus for KSU’s outlook.
- Valuation: What is KSU 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 KSU 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 firstname.lastname@example.org.