How Financially Strong Is The KCP Limited (NSE:KCP)?
While small-cap stocks, such as The KCP Limited (NSE:KCP) with its market cap of ₹11b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, these checks don't give you a full picture, so I suggest you dig deeper yourself into KCP here.
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Does KCP Produce Much Cash Relative To Its Debt?
Over the past year, KCP has ramped up its debt from ₹5.2b to ₹5.6b , which accounts for long term debt. With this growth in debt, the current cash and short-term investment levels stands at ₹245m to keep the business going. On top of this, KCP has produced ₹2.1b in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 39%, indicating that KCP’s operating cash is sufficient to cover its debt.
Can KCP meet its short-term obligations with the cash in hand?
At the current liabilities level of ₹4.1b, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.42x. The current ratio is the number you get when you divide current assets by current liabilities. For Basic Materials 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 KCP service its debt comfortably?
With a debt-to-equity ratio of 63%, KCP can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if KCP’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 KCP, the ratio of 4.49x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving KCP ample headroom to grow its debt facilities.
Next Steps:
KCP’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. 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 KCP has been performing in the past. I suggest you continue to research KCP to get a better picture of the small-cap by looking at:
Valuation: What is KCP 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 KCP is currently mispriced by the market.
Historical Performance: What has KCP'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.
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.
