AZZ Inc (NYSE:AZZ) is a small-cap stock with a market capitalization of US$1.41b. 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? So, understanding the company’s financial health becomes vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into AZZ here.
Does AZZ produce enough cash relative to debt?
Over the past year, AZZ has ramped up its debt from US$299.8m to US$322.1m – this includes both the current and long-term debt. With this growth in debt, AZZ’s cash and short-term investments stands at US$13.9m for investing into the business. Additionally, AZZ has generated cash from operations of US$82.3m during the same period of time, resulting in an operating cash to total debt ratio of 25.6%, meaning that AZZ’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In AZZ’s case, it is able to generate 0.26x cash from its debt capital.
Does AZZ’s liquid assets cover its short-term commitments?
Looking at AZZ’s most recent US$126.9m liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$375.4m, leading to a 2.96x current account ratio. Generally, for Electrical companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is AZZ’s debt level acceptable?
With debt reaching 55.9% of equity, AZZ may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. 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 after interest and tax at least three times its net interest payments is considered financially sound. In AZZ’s case, the ratio of 3.62x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as AZZ’s high interest coverage is seen as responsible and safe practice.
Although AZZ’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how AZZ has been performing in the past. I recommend you continue to research AZZ to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AZZ’s future growth? Take a look at our free research report of analyst consensus for AZZ’s outlook.
- Valuation: What is AZZ 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 AZZ 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.