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Is Barnes Group Inc.'s (NYSE:B) Balance Sheet A Threat To Its Future?

Simply Wall St

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Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Barnes Group Inc. (NYSE:B), with a market cap of US$2.7b, often get neglected by retail investors. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. B’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into B here.

View our latest analysis for Barnes Group

B’s Debt (And Cash Flows)

B's debt levels surged from US$521m to US$940m over the last 12 months – this includes long-term debt. With this rise in debt, B currently has US$104m remaining in cash and short-term investments to keep the business going. On top of this, B has produced cash from operations of US$260m over the same time period, leading to an operating cash to total debt ratio of 28%, meaning that B’s operating cash is sufficient to cover its debt.

Can B meet its short-term obligations with the cash in hand?

At the current liabilities level of US$369m, it appears that the company has been able to meet these commitments with a current assets level of US$797m, leading to a 2.16x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Machinery companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

NYSE:B Historical Debt, June 19th 2019

Is B’s debt level acceptable?

With debt reaching 74% of equity, B may be thought of as relatively highly levered. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if B’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 B, the ratio of 12.73x suggests that interest is comfortably 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:

Although B’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. I admit this is a fairly basic analysis for B's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Barnes Group to get a more holistic view of the mid-cap by looking at:

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