Stocks with market capitalization between $2B and $10B, such as Simpson Manufacturing Co., Inc. (NYSE:SSD) with a size of US$2.9b, do not attract as much attention from the investing community as do the small-caps and large-caps. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. Today we will look at SSD’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into SSD here.
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SSD’s Debt (And Cash Flows)
Over the past year, SSD has ramped up its debt from US$3.5m to US$38m , which includes long-term debt. With this increase in debt, SSD’s cash and short-term investments stands at US$113m to keep the business going. On top of this, SSD has produced cash from operations of US$153m over the same time period, resulting in an operating cash to total debt ratio of 406%, signalling that SSD’s current level of operating cash is high enough to cover debt.
Does SSD’s liquid assets cover its short-term commitments?
With current liabilities at US$151m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.82x. The current ratio is calculated by dividing current assets by current liabilities. Having said that, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.
Does SSD face the risk of succumbing to its debt-load?
SSD’s level of debt is low relative to its total equity, at 4.5%. SSD is not taking on too much debt commitment, which may be constraining for future growth. We can test if SSD’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 SSD, the ratio of 247x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as SSD’s high interest coverage is seen as responsible and safe practice.
SSD has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for SSD’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Simpson Manufacturing to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SSD’s future growth? Take a look at our free research report of analyst consensus for SSD’s outlook.
- Valuation: What is SSD 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 SSD 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.
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 firstname.lastname@example.org. 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.