Yahoo Finance Kid ASA (OB:KID): Time For A Financial Health Check
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Investors are always looking for growth in small-cap stocks like Kid ASA (OB:KID), with a market cap of øre1.7b. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Specialty Retail industry facing headwinds from current disruption, even ones that are profitable, tend to be high risk. Evaluating financial health as part of your investment thesis is vital. Here are few basic financial health checks you should consider before taking the plunge. Though, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into KID here.
Does KID produce enough cash relative to debt?
KID’s debt level has been constant at around øre428m over the previous year which accounts for long term debt. At this stable level of debt, KID currently has øre242m remaining in cash and short-term investments , ready to deploy into the business. Additionally, KID has produced cash from operations of øre265m during the same period of time, leading to an operating cash to total debt ratio of 62%, indicating that KID’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In KID’s case, it is able to generate 0.62x cash from its debt capital.
Can KID meet its short-term obligations with the cash in hand?
Looking at KID’s øre253m in current liabilities, it appears that the company has been able to meet these commitments with a current assets level of øre532m, leading to a 2.1x current account ratio. Generally, for Specialty Retail companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does KID face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 39%, KID’s debt level may be seen as prudent. This range is considered safe as KID is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether KID 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 KID’s, case, the ratio of 15.1x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Next Steps:
KID’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how KID has been performing in the past. I recommend you continue to research Kid to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for KID’s future growth? Take a look at our free research report of analyst consensus for KID’s outlook.
Valuation: What is KID 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 KID 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
