Is Kirby Corporation's (NYSE:KEX) Balance Sheet Strong Enough To Weather A Storm?
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Kirby Corporation (NYSE:KEX) is a small-cap stock with a market capitalization of US$4.8b. 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? Understanding the company's financial health becomes essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, potential investors would need to take a closer look, and I recommend you dig deeper yourself into KEX here.
KEX’s Debt (And Cash Flows)
Over the past year, KEX has ramped up its debt from US$1.4b to US$1.8b , which includes long-term debt. With this increase in debt, the current cash and short-term investment levels stands at US$7.3m to keep the business going. Additionally, KEX has generated cash from operations of US$367m over the same time period, leading to an operating cash to total debt ratio of 20%, indicating that KEX’s debt is not covered by operating cash.
Does KEX’s liquid assets cover its short-term commitments?
At the current liabilities level of US$583m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.92x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Shipping companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Is KEX’s debt level acceptable?
With a debt-to-equity ratio of 51%, KEX 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 KEX’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 KEX, the ratio of 5.3x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as KEX’s high interest coverage is seen as responsible and safe practice.
Next Steps:
Although KEX’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. Since there is also no concerns around KEX's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure KEX has company-specific issues impacting its capital structure decisions. You should continue to research Kirby to get a better picture of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for KEX’s future growth? Take a look at our free research report of analyst consensus for KEX’s outlook.
Valuation: What is KEX 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 KEX 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.
