Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as Konecranes Plc (HEL:KCR) with a market-capitalization of €2.5b, rarely draw their attention. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. This article will examine KCR’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Don’t forget that this is a general and concentrated examination of Konecranes’s financial health, so you should conduct further analysis into KCR here.
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How does KCR’s operating cash flow stack up against its debt?
KCR has sustained its debt level by about €776m over the last 12 months – this includes long-term debt. At this current level of debt, the current cash and short-term investment levels stands at €231m , ready to deploy into the business. On top of this, KCR has produced €109m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 14%, indicating that KCR’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In KCR’s case, it is able to generate 0.14x cash from its debt capital.
Can KCR pay its short-term liabilities?
Looking at KCR’s €1.3b in current liabilities, the company has been able to meet these obligations given the level of current assets of €1.6b, with a current ratio of 1.29x. For Machinery 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 KCR face the risk of succumbing to its debt-load?
KCR is a relatively highly levered company with a debt-to-equity of 60%. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if KCR’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 KCR, the ratio of 11.4x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving KCR ample headroom to grow its debt facilities.
Next Steps:
Although KCR’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how KCR has been performing in the past. I suggest you continue to research Konecranes to get a more holistic view of the mid-cap by looking at: