Investors are always looking for growth in small-cap stocks like Kimball Electronics, Inc. (NASDAQ:KE), with a market cap of US$409m. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Electronic industry, even ones that are profitable, are more likely to be higher risk. Assessing first and foremost the financial health is vital. I believe these basic checks tell most of the story you need to know. Though, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into KE here.
Does KE produce enough cash relative to debt?
Over the past year, KE has ramped up its debt from US$14m to US$59m made up of predominantly near term debt. With this growth in debt, the current cash and short-term investment levels stands at US$75m , ready to deploy into the business. Moreover, KE has produced US$30m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 51%, meaning that KE’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 KE’s case, it is able to generate 0.51x cash from its debt capital.
Can KE meet its short-term obligations with the cash in hand?
Looking at KE’s US$280m in current liabilities, the company has been able to meet these commitments with a current assets level of US$492m, leading to a 1.76x current account ratio. For Electronic companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does KE face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 17%, KE’s debt level may be seen as prudent. This range is considered safe as KE is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether KE 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 KE’s, case, the ratio of 56.27x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as KE’s high interest coverage is seen as responsible and safe practice.
KE has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure KE has company-specific issues impacting its capital structure decisions. You should continue to research Kimball Electronics to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for KE’s future growth? Take a look at our free research report of analyst consensus for KE’s outlook.
- Valuation: What is KE 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 KE 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.