Stocks with market capitalization between $2B and $10B, such as Sealed Air Corporation (NYSE:SEE) with a size of $8.65B, do not attract as much attention from the investing community as do the small-caps and large-caps. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. Mid-caps are found to be more volatile than the large-caps but safer than small-caps, largely due to their weaker balance sheet. I’ve put together a small checklist, which I believe provides a ballpark estimate of their financial health status. See our latest analysis for SEE
Is SEE’s level of debt at an acceptable level?
A substantially higher debt poses a significant threat to a company’s profitability during a downturn. SEE’s debt-to-equity ratio exceeds 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. 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 (EBIT) at least three times its interest payments is considered financially sound. SEE’s profits amply covers interest at 4.12 times, which is seen as relatively safe. Lenders may be less hesitant to lend out more funding as SEE’s high interest coverage is seen as responsible and safe practice.
Can SEE pay its short-term liabilities?
A different measure of financial health is measured by its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. If an adverse event occurs, the company may be forced to pay these immediate expenses with its liquid assets. To assess this, I compare SEE’s cash and other liquid assets against its upcoming debt. Our analysis shows that SEE does have enough liquid assets on hand to meet its upcoming liabilities, which lowers our concerns should adverse events arise.
Are you a shareholder? SEE’s high debt levels are not met with high cash flow coverage. This means investors should ask themselves if they think SEE can improve in terms of debt management and operational efficiency. Since SEE’s financial position could change, I encourage researching market expectations for SEE’s future growth on our free analysis platform.
Are you a potential investor? Although investors should analyse the serviceability of debt, it shouldn’t be viewed in isolation of other factors. Ultimately, debt financing is an important source of funding for companies seeking to grow through new projects and investments. SEE’s Return on Capital Employed (ROCE) in order to see management’s track record at deploying funds in high-returning projects.