Investors are always looking for growth in small-cap stocks like Kraton Corporation (NYSE:KRA), with a market cap of US$1.54b. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, I know these factors are very high-level, so I recommend you dig deeper yourself into KRA here.
How does KRA’s operating cash flow stack up against its debt?
Over the past year, KRA has reduced its debt from US$1.74b to US$1.62b , which comprises of short- and long-term debt. With this debt repayment, the current cash and short-term investment levels stands at US$89.05m , ready to deploy into the business. Moreover, KRA has generated US$255.44m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 15.79%, indicating that KRA’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In KRA’s case, it is able to generate 0.16x cash from its debt capital.
Does KRA’s liquid assets cover its short-term commitments?
At the current liabilities level of US$350.71m liabilities, the company has been able to meet these commitments with a current assets level of US$729.75m, leading to a 2.08x current account ratio. For Chemicals companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can KRA service its debt comfortably?
With total debt exceeding equities, KRA is considered a highly levered company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. 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 after interest and tax at least three times its net interest payments is considered financially sound. In KRA’s case, the ratio of 1.64x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
KRA’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Though, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for KRA’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Kraton to get a better picture of the stock by looking at:
- Valuation: What is KRA 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 KRA is currently mispriced by the market.
- Historical Performance: What has KRA’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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 pass 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.