They keep getting their results out earlier each year, which reinforces that not only is it a really uncomplicated operating business, but that the internal accounting system is on-point .... an important tool for financial control and for the company's managers to remain on top of the issues at all times (which self-evidently is the case).
Often, a financial result that comes out at 5:00pm on a Friday afternoon - when everyone has gone mouse-down - contains bad news that management might want to attempt to slip under the radar.
Not KOV.
For it was indeed a quite stellar result; indeed like no other KOV result before it:
View attachment 4538962As part of the continual learning process, I always find it instructive to review my file notes for stocks I've researched.
A few years ago I thought that, when the recovery in KOV's EBIT Margin and ROE occurred, it might look something like this:
So EBIT Margin getting back to 9% and ROE close to 15% was my central scenario at the time of the formulation of those charts.
Well, forward to today, and I find that the
EBIT Margin is 15% and
ROE is 26% [*]... I was not even close! (When I do get them wrong in the future, would that I get them wrong in the same way that I've got KOV wrong!)
[*] And bear in mind, that 26% ROE is generated despite a very lazy capital structure. The balance sheet could easily be geared to generate even higher ROE, if the board was of such a mind (and I'm glad it isn't given the highly cyclical nature of the business).
And it was not just excellent at the headline accounting profit level - which, recall, had been flagged a few weeks ago - but also in terms of the strong cash flow generated; despite a very substantial inventory build (which I think is most prudent given the supply chain challenges, and especially the sizeable pipeline of work that lies ahead.)
Over the past 12 months, KOV management increased inventory by a highly significant 64%, from $12.4m to $20.5m, so more than an $8m increase. Despite that, the company still generated $4.0m in Operating Cash Flow and $2m in Free Cash Flow.
Specifically, in the second half, the company's net cash balance rose by $1.0m, despite $2.8m investment in extra inventory, as well as a $2.9m dividend having being paid.
Such is the organic capital generation of the business.
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