While small-cap stocks, such as Koenig & Bauer AG (FRA:SKB) with its market cap of €719m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into SKB here.
How does SKB’s operating cash flow stack up against its debt?
Over the past year, SKB has ramped up its debt from €35m to €59m , which comprises of short- and long-term debt. With this rise in debt, the current cash and short-term investment levels stands at €122m for investing into the business. Moreover, SKB has generated cash from operations of €61m during the same period of time, leading to an operating cash to total debt ratio of 103%, meaning that SKB’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In SKB’s case, it is able to generate 1.03x cash from its debt capital.
Can SKB meet its short-term obligations with the cash in hand?
With current liabilities at €526m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.44x. 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.
Can SKB service its debt comfortably?
SKB’s level of debt is appropriate relative to its total equity, at 15%. SKB is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether SKB 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 SKB’s, case, the ratio of 51.69x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as SKB’s high interest coverage is seen as responsible and safe practice.
SKB has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for SKB’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Koenig & Bauer to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SKB’s future growth? Take a look at our free research report of analyst consensus for SKB’s outlook.
- Valuation: What is SKB 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 SKB 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 email@example.com.