What Investors Should Know About L-Konzept Holding AG’s (FRA:LKB) Financial Strength

While small-cap stocks, such as L-Konzept Holding AG (DB:LKB) with its market cap of €3.66M, 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 essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I recommend you dig deeper yourself into LKB here.

Does LKB generate an acceptable amount of cash through operations?

LKB has built up its total debt levels in the last twelve months, from €270.19K to €1.05M – this includes both the current and long-term debt. With this growth in debt, the current cash and short-term investment levels stands at €1.02M for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can take a look at some of LKB’s operating efficiency ratios such as ROA here.

Can LKB meet its short-term obligations with the cash in hand?

At the current liabilities level of €682.76K liabilities, it appears that the company has been able to meet these obligations given the level of current assets of €5.87M, with a current ratio of 8.6x. However, a ratio greater than 3x may be considered as too high, as LKB could be holding too much capital in a low-return investment environment.

DB:LKB Historical Debt Jun 20th 18

Can LKB service its debt comfortably?

With debt reaching 48.98% of equity, LKB may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether LKB 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 LKB’s, case, the ratio of 209x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving LKB ample headroom to grow its debt facilities.

Next Steps:

At its current level of cash flow coverage, LKB has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how LKB has been performing in the past. You should continue to research L-Konzept Holding to get a better picture of the stock by looking at:

1. Valuation: What is LKB 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 LKB is currently mispriced by the market.

2. Historical Performance: What has LKB’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.

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.