Small-cap companies such as American Woodmark Corporation (NASDAQ:AMWD) with its market cap of USD $1.43 Billion, have high growth potential but financial strength is the deciding factor in their long-term survival. On the surface, companies with a debt-to-equity ratio of less than 20% appear to have a sound debt structure, as is the case with AMWD. But it is important you also look at other financial strength metrics to have the complete picture, like are they resilient enough to face an economic or industry downturn?
One of the major reasons that they are highly affected by a downturn in the country’s economy or an industry in the region is the lack of geographic diversification. So, investors often choose small-cap funds. While savvy investors aren’t wrong in looking for singular blockbuster opportunities and trying to achieve diversification on their own by allocating a small part of their portfolio capital to small-caps, that doesn’t make these investments less risky individually. However, to help you reduce that risk, I’m going to provide you with few basic aspects other than debt-to-equity ratio to gauge a ballpark estimate on how financially strong is the company. View our latest analysis for American Woodmark
How American Woodmark’s liquid assets stack up against its debt?
Even the most successful companies face downturn as competitors, consumers and disruptors keep reshaping markets, but they survive due to their strong liquidity position (and also the ability to adjust quickly). Comparing American Woodmark’s liquid assets to its debt would let me know if it’s resilient enough. AMWD’s short-term assets ($328 Million) cover its total debt ($26 Million), so the company’s debt is not a major concern during adverse circumstances
Does AMWD earn more than its interest payments?
One of the key checks of American Woodmark’s financial health is to compare what it earns against the amount it pays as interest. This highlights the company’s ability to service debt during a downturn.A 5x multiple of earnings to interest expense is what I consider to be a benchmark for a financially strong company. In AMWD’s case, the interest on debt is well covered by earnings (112.6x coverage).
Not only does American Woodmark has a well-managed debt profile, its interest costs are well covered by its net income and operating cash flows are strong enough to contribute in its growth activities or pay dividends. In short, it’s creating value for shareholders. Now when you know whether you should keep the debt in mind as a risk factor when putting together your investment thesis, I recommend you check out our latest free analysis report on American Woodmark to see what are AMWD’s growth prospects and whether it could be considered an undervalued opportunity.
PS. If you are not interested in American Woodmark anymore, you can use our free platform to see my list of over 150 other stocks with a high growth potential.