Investors are always looking for growth in small-cap stocks like Mueller Water Products, Inc. (NYSE:MWA), with a market cap of US$1.6b. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company’s balance sheet strength. However, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into MWA here.
Does MWA Produce Much Cash Relative To Its Debt?
Over the past year, MWA has reduced its debt from US$481m to US$446m , which also accounts for long term debt. With this reduction in debt, MWA currently has US$199m remaining in cash and short-term investments to keep the business going. On top of this, MWA has produced US$143m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 32%, signalling that MWA’s operating cash is sufficient to cover its debt.
Can MWA meet its short-term obligations with the cash in hand?
Looking at MWA’s US$169m in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$530m, leading to a 3.14x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Having said that, a ratio greater than 3x may be considered by some to be quite high, however this is not necessarily a negative for the company.
Is MWA’s debt level acceptable?
With a debt-to-equity ratio of 83%, MWA can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if MWA’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For MWA, the ratio of 5.67x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving MWA ample headroom to grow its debt facilities.
MWA’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around MWA’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure MWA has company-specific issues impacting its capital structure decisions. I recommend you continue to research Mueller Water Products to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for MWA’s future growth? Take a look at our free research report of analyst consensus for MWA’s outlook.
- Valuation: What is MWA 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 MWA is currently mispriced by the market.
- 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.
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