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Is Apogee Enterprises, Inc.'s (NASDAQ:APOG) Balance Sheet A Threat To Its Future?

Simply Wall St

While small-cap stocks, such as Apogee Enterprises, Inc. (NASDAQ:APOG) with its market cap of US$1.0b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is vital, since poor capital management may bring about 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. However, this is just a partial view of the stock, and I’d encourage you to dig deeper yourself into APOG here.

APOG’s Debt (And Cash Flows)

APOG's debt levels surged from US$216m to US$246m over the last 12 months , which accounts for long term debt. With this increase in debt, APOG's cash and short-term investments stands at US$29m to keep the business going. On top of this, APOG has produced US$96m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 39%, meaning that APOG’s operating cash is sufficient to cover its debt.

Can APOG pay its short-term liabilities?

With current liabilities at US$228m, the company has been able to meet these commitments with a current assets level of US$372m, leading to a 1.63x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. For Building companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.

NasdaqGS:APOG Historical Debt, April 15th 2019

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

With debt reaching 50% of equity, APOG may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. 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 APOG's case, the ratio of 8.31x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

APOG’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for APOG's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Apogee Enterprises to get a better picture of the small-cap by looking at:

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