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Is Knoll, Inc.’s (NYSE:KNL) Balance Sheet A Threat To Its Future?

Simply Wall St

Investors are always looking for growth in small-cap stocks like Knoll, Inc. (NYSE:KNL), with a market cap of US$997m. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is crucial, 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 suggest you dig deeper yourself into KNL here.

Does KNL Produce Much Cash Relative To Its Debt?

KNL’s debt levels surged from US$191m to US$463m over the last 12 months – this includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at US$1.6m to keep the business going. Moreover, KNL has generated US$108m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 23%, meaning that KNL’s operating cash is sufficient to cover its debt.

Can KNL pay its short-term liabilities?

At the current liabilities level of US$273m, it appears that the company has been able to meet these commitments with a current assets level of US$332m, leading to a 1.22x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. For Commercial Services 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.

NYSE:KNL Historical Debt, March 12th 2019

Can KNL service its debt comfortably?

With total debt exceeding equity, KNL 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. 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 before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In KNL’s case, the ratio of 6.2x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as KNL’s high interest coverage is seen as responsible and safe practice.

Next Steps:

Although KNL’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. Since there is also no concerns around KNL’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure KNL has company-specific issues impacting its capital structure decisions. You should continue to research Knoll to get a more holistic view of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for KNL’s future growth? Take a look at our free research report of analyst consensus for KNL’s outlook.
  2. Valuation: What is KNL 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 KNL is currently mispriced by the market.
  3. 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 editorial-team@simplywallst.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.