Is Quanex Building Products Corporation’s (NYSE:NX) Balance Sheet Strong Enough To Weather A Storm?

Quanex Building Products Corporation (NYSE:NX) is a small-cap stock with a market capitalization of US$551m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Understanding the company’s financial health becomes essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Let’s work through some financial health checks you may wish to consider if you’re interested in this stock. Nevertheless, this is not a comprehensive overview, so I’d encourage you to dig deeper yourself into NX here.

NX’s Debt (And Cash Flows)

NX has sustained its debt level by about US$231m over the last 12 months which accounts for long term debt. At this current level of debt, NX’s cash and short-term investments stands at US$17m to keep the business going. Moreover, NX has generated cash from operations of US$76m in the last twelve months, leading to an operating cash to total debt ratio of 33%, meaning that NX’s debt is appropriately covered by operating cash.

Can NX meet its short-term obligations with the cash in hand?

Looking at NX’s US$72m in current liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.48x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Building companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

NYSE:NX Historical Debt, April 15th 2019
NYSE:NX Historical Debt, April 15th 2019

Does NX face the risk of succumbing to its debt-load?

With a debt-to-equity ratio of 59%, NX 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. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In NX’s case, the ratio of 3.37x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving NX ample headroom to grow its debt facilities.

Next Steps:

NX’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 NX’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how NX has been performing in the past. I recommend you continue to research Quanex Building Products to get a more holistic view of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for NX’s future growth? Take a look at our free research report of analyst consensus for NX’s outlook.
  2. Valuation: What is NX 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 NX is currently mispriced by the market.
  3. 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.