Preferred Stock: Karsten (CTKA4)
Current Market Price: R$ 12.51
Market Capitalization: R$ 95 million
*All values in this article are expressed in Brazilian Reais (BRL) unless otherwise noted.
**The bulk of this analysis is based on the company’s most recent audited financial report, which can be found by following this link.
Karsten Stock – Summary of the Company
Karsten is a Brazilian textile manufacturing company. They are specialized in textiles for beds, tables, bathrooms, and decorations. The company has around ten brick and mortar stores in addition to selling through seven thousand other points of sale in Brazil, as well as online. They export to twenty three countries. Karsten was founded in 1882 and is headquartered in Blumenau, in the state of Santa Catarina, Brazil. The company employees around 1,900 people.
Revenue and Cost Analysis
Karsten has grown its revenue over the past several years. Revenue has increased from R$ 309.7 million in 2017, to R$ 316.6 million in 2018, to R$ 337.3 million in 2019. The company had COGS of R$ 200.8 million in 2019, representing a gross margin of 40%, roughly equal to the company’s gross margin in both 2017 and 2018.
Although Karsten has had a positive EBIT for the past several years, the company has significant financing expenses, which have made the company unprofitable. Karsten had a net loss of R$ 12.4 million in 2019, an improvement from 2018’s net loss of R$ 52.6 million.
Balance Sheet Analysis
Karsten does not have a strong balance sheet. On the positive side, they have a sound base of long term assets and sufficient liquidity in the near term. However, the company has high liability levels, including excessive debt.
Krasten – Debt Analysis
The company has a significant amount of debt outstanding. As of year-end 2019, Karsten has R$ 526.2 million in total debt outstanding, of which R$ 28.9 million is classified as current. Furthermore R$ 5.8 million of this debt is denominated in US Dollars, exposing the company to a depreciating Brazilian Real.
Karsten Stock – Share Dynamics and Capital Structure
As of year-end 2019, Karsten has 2.9 million common shares outstanding and 3.3 million preferred shares outstanding. Total shares outstanding is around 6.2 million shares. The company’s shares are tightly held, with one institution owning around 86% of the company.
Karsten Stock – Dividends
The company did not pay a dividend in 2019.
Karsten Stock – 3 Metrics to Consider
Debt to Equity Ratio
Total Liabilities/Total Share Holder Equity
R$ 653.4 million/ -R$ 272.6 million = -2.4
A debt to equity ratio of negative 2.4 indicates that Karsten has accumulated losses and has significantly more liabilities than shareholder equity. The company faces the possibility of insolvency and investors should carefully analyze the company’s liabilities before investing.
Interest Coverage Ratio
EBIT/ Interest Expense
R$ 34.7 million / R$ 44.4 million = .78
An interest coverage ratio of .78 indicates a weak liquidity position. Karsten is not generating enough operating income to meet the interest on its debt, calling into question its ability to service its debt moving forward.
Working Capital Ratio
Current Assets/Current Liabilities
R$ 228.8 million / R$ 117.6 million = 1.95
A working capital ratio of 1.95 indicates a sufficient but not strong liquidity position.
Karsten Stock – Summary and Conclusions
Karsten is a very interesting company. Any company that has been in continuous operation since 1882 is impressive. Karsten has been growing its top line sales over the past several years without sacrificing its gross margins. The company sells its products at seven thousand points of sale throughout Brazil and exports.
The problem with Karsten stock from an investors perspective is that the company is over leveraged. Karsten has excessive debt which is weighing heavily on earnings, causing the company to be unprofitable. I am not willing to invest in a company that is this highly leveraged. If I were to invest in a Brazilian textile manufacturer, I would prefer to allocate to Dohler, which is less leveraged and in a better position financially.
Disclaimer
This is not investment advice. Nothing in this analysis should be construed as a recommendation to buy, sell, or otherwise take action related to the security discussed. If I own a position in the security discussed, I will clearly state it.
This is not intended to be a comprehensive analysis and you should not make an investment decision based solely on the information in this analysis. I hope this serves as a useful starting point for a more comprehensive analysis, and hopefully draws attention to aspects of the company that were overlooked or merit further investigation. This is by no means intended to be a complete analysis. Again, this is not investment advice, do your own research.
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