Stocks with market capitalization between $2B and $10B, such as Boyd Gaming Corporation (NYSE:BYD) with a size of USD $3.40B, do not attract as much attention from the investing community as do the small-caps and large-caps. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. I recommend you look at the following hurdles to assess BYD’s financial health. See our latest analysis for BYD
Is BYD’s level of debt at an acceptable level?
A substantially higher debt poses a significant threat to a company’s profitability during a downturn. For BYD, the debt-to-equity ratio stands at above 100%, which indicates that the company is holding a high level of debt relative to its net worth. In the event of financial turmoil, the company may experience difficulty meeting interest and other debt obligations. While debt-to-equity ratio has several factors at play, an easier way to check whether BYD’s leverage is at a sustainable level is to check its ability to service the debt. A company generating earnings at least three times its interest payments is considered financially sound. BYD’s interest on debt is not strongly covered by earnings as it sits at around 1.93x. Lenders may be more reluctant to lend out more funding as BYD’s low interest coverage already puts the company at higher risk of default.
Does BYD’s liquid assets cover its short-term commitments?
Debt to equity ratio is an important aspect of financial strength. But if the company has a substantial amount of cash on its balance sheet, that should allay some fear of a debt overhang and increase the chance of meeting upcoming liabilities. To assess this, I compare BYD’s cash and other liquid assets against its upcoming debt. Our analysis shows that BYD does not have enough liquid assets on hand to meet its upcoming liabilities. Though this is a common practice, since cash is better utilized invested in the business or returned to shareholders, it does raise some concerns for investors should adverse events arise.
Are you a shareholder? With a high level of debt on its balance sheet, BYD could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case so investors should ask themselves if they believe BYD can sustainably increase its operational efficiency going forward. Since BYD’s financial situation could change, You should continue assessing market expectations for BYD’s future growth on our free analysis platform.
Are you a potential investor? While understanding the serviceability of debt is important when evaluating which companies are viable investments, it shouldn’t be the deciding factor. Ultimately, debt financing is an important source of funding for companies seeking to grow through new projects and investments. BYD’s Return on Capital Employed (ROCE) in order to see management’s track record at deploying funds in high-returning projects.