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Kier Group plc (LON:KIE) is a small-cap stock with a market capitalization of UK£875.7m. 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? Evaluating financial health as part of your investment thesis is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I recommend you dig deeper yourself into KIE here.
How much cash does KIE generate through its operations?
Over the past year, KIE has ramped up its debt from UK£514.2m to UK£680.3m , which is made up of current and long term debt. With this growth in debt, KIE currently has UK£415.0m remaining in cash and short-term investments for investing into the business. Additionally, KIE has produced UK£188.1m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 27.6%, meaning that KIE’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In KIE’s case, it is able to generate 0.28x cash from its debt capital.
Can KIE meet its short-term obligations with the cash in hand?
Looking at KIE’s most recent UK£1.41b liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.11x. Generally, for Construction 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.
Does KIE face the risk of succumbing to its debt-load?
KIE is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether KIE 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 KIE’s, case, the ratio of 6.64x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as KIE’s high interest coverage is seen as responsible and safe practice.