What You Must Know About IKONICS Corporation’s (NASDAQ:IKNX) Financial Strength
IKONICS Corporation (NASDAQ:IKNX) is a small-cap stock with a market capitalization of US$20m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Assessing first and foremost the financial health is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into IKNX here.
How does IKNX’s operating cash flow stack up against its debt?
IKNX has sustained its debt level by about US$3.0m over the last 12 months which accounts for long term debt. At this stable level of debt, IKNX currently has US$4.3m remaining in cash and short-term investments , ready to deploy into the business. On top of this, IKNX has produced cash from operations of US$1.1m during the same period of time, leading to an operating cash to total debt ratio of 38%, meaning that IKNX’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In IKNX’s case, it is able to generate 0.38x cash from its debt capital.
Can IKNX pay its short-term liabilities?
Looking at IKNX’s US$1.3m in current liabilities, the company has been able to meet these commitments with a current assets level of US$8.7m, leading to a 6.52x current account ratio. However, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.
Does IKNX face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 23%, IKNX’s debt level may be seen as prudent. This range is considered safe as IKNX is not taking on too much debt obligation, which may be constraining for future growth. We can test if IKNX’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 IKNX, the ratio of 5.03x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving IKNX ample headroom to grow its debt facilities.
Next Steps:
IKNX has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure IKNX has company-specific issues impacting its capital structure decisions. I suggest you continue to research IKONICS to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for IKNX’s future growth? Take a look at our free research report of analyst consensus for IKNX’s outlook.
Valuation: What is IKNX 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 IKNX 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 editorial-team@simplywallst.com.
