Investors are always looking for growth in small-cap stocks like Kronos Worldwide Inc (NYSE:KRO), with a market cap of US$1.5b. However, an important fact which most ignore is: how financially healthy is the business? 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. I believe these basic checks tell most of the story you need to know. Though, I know these factors are very high-level, so I recommend you dig deeper yourself into KRO here.
How much cash does KRO generate through its operations?
KRO has sustained its debt level by about US$466m over the last 12 months which accounts for long term debt. At this current level of debt, KRO currently has US$432m remaining in cash and short-term investments for investing into the business. Moreover, KRO has produced US$257m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 55%, meaning that KRO’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 KRO’s case, it is able to generate 0.55x cash from its debt capital.
Does KRO’s liquid assets cover its short-term commitments?
At the current liabilities level of US$250m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 4.96x. Having said that, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.
Is KRO’s debt level acceptable?
KRO is a relatively highly levered company with a debt-to-equity of 53%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if KRO’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For KRO, the ratio of 26.1x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving KRO ample headroom to grow its debt facilities.
Although KRO’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 KRO’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for KRO’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Kronos Worldwide to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for KRO’s future growth? Take a look at our free research report of analyst consensus for KRO’s outlook.
- Valuation: What is KRO 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 KRO 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.