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Is KAP AG's (FRA:IUR) Balance Sheet A Threat To Its Future?

Simply Wall St

KAP AG ( FRA:IUR ) is a small-cap stock with a market capitalization of €287m. 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 vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, potential investors would need to take a closer look, and I recommend you dig deeper yourself into IUR here .

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Does IUR Produce Much Cash Relative To Its Debt?

IUR's debt levels surged from €83m to €103m over the last 12 months , which includes long-term debt. With this growth in debt, IUR's cash and short-term investments stands at €5.6m , ready to be used for running the business. Moreover, IUR has generated €25m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 24%, indicating that IUR’s current level of operating cash is high enough to cover debt.

Does IUR’s liquid assets cover its short-term commitments?

With current liabilities at €110m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.5x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Industrials companies, this is a reasonable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

DB:IUR Historical Debt, May 24th 2019

Does IUR face the risk of succumbing to its debt-load?

With a debt-to-equity ratio of 52%, IUR 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 check to see whether IUR 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 IUR's, case, the ratio of 2.43x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.

Next Steps:

Although IUR’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 IUR has been performing in the past. I suggest you continue to research KAP to get a more holistic view of the small-cap by looking at:

  1. Future Outlook : What are well-informed industry analysts predicting for IUR’s future growth? Take a look at our free research report of analyst consensus for IUR’s outlook.
  2. Historical Performance : What has IUR'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.
  3. 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.