Investors are always looking for growth in small-cap stocks like KVH Industries, Inc. (NASDAQ:KVHI), with a market cap of US$199m. However, an important fact which most ignore is: how financially healthy is the business? Communications companies, especially ones that are currently loss-making, tend to be high risk. So, understanding the company’s financial health becomes vital. 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 KVHI here.
How does KVHI’s operating cash flow stack up against its debt?
Over the past year, KVHI has maintained its debt levels at around US$46m – this includes long-term debt. At this stable level of debt, KVHI’s cash and short-term investments stands at US$33m , ready to deploy into the business. Additionally, KVHI has generated US$3.9m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 8.5%, indicating that KVHI’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency for loss making businesses as traditional metrics such as return on asset (ROA) requires a positive net income. In KVHI’s case, it is able to generate 0.085x cash from its debt capital.
Does KVHI’s liquid assets cover its short-term commitments?
At the current liabilities level of US$69m, it seems that the business has been able to meet these commitments with a current assets level of US$94m, leading to a 1.36x current account ratio. Generally, for Communications companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can KVHI service its debt comfortably?
KVHI is a relatively highly levered company with a debt-to-equity of 45%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since KVHI is presently loss-making, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
KVHI’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around KVHI’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how KVHI has been performing in the past. I recommend you continue to research KVH Industries to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for KVHI’s future growth? Take a look at our free research report of analyst consensus for KVHI’s outlook.
- Valuation: What is KVHI 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 KVHI 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.