Worthington Industries, Inc. (NYSE:WOR) is a small-cap stock with a market capitalization of US$2.2b. 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? Assessing first and foremost the financial health is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. We’ll look at some basic checks that can form a snapshot the company’s financial strength. However, these checks don’t give you a full picture, so I suggest you dig deeper yourself into WOR here.
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WOR’s Debt (And Cash Flows)
Over the past year, WOR has maintained its debt levels at around US$749m including long-term debt. At this constant level of debt, WOR’s cash and short-term investments stands at US$113m , ready to be used for running the business. Moreover, WOR has generated cash from operations of US$206m in the last twelve months, resulting in an operating cash to total debt ratio of 27%, signalling that WOR’s operating cash is sufficient to cover its debt.
Can WOR pay its short-term liabilities?
At the current liabilities level of US$565m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.13x. The current ratio is calculated by dividing current assets by current liabilities. For Metals and Mining companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can WOR service its debt comfortably?
With debt reaching 77% of equity, WOR may be thought of as relatively highly levered. 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 WOR’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 WOR, the ratio of 4.17x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as WOR’s high interest coverage is seen as responsible and safe practice.
WOR’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 WOR’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 WOR has company-specific issues impacting its capital structure decisions. I recommend you continue to research Worthington Industries to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for WOR’s future growth? Take a look at our free research report of analyst consensus for WOR’s outlook.
- Valuation: What is WOR 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 WOR 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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