Is Beacon Roofing Supply, Inc.’s (NASDAQ:BECN) Balance Sheet A Threat To Its Future?
Stocks with market capitalization between $2B and $10B, such as Beacon Roofing Supply, Inc. (NASDAQ:BECN) with a size of US$2.3b, do not attract as much attention from the investing community as do the small-caps and large-caps. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. Today we will look at BECN’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into BECN here.
See our latest analysis for Beacon Roofing Supply
Want to help shape the future of investing tools and platforms? Take the survey and be part of one of the most advanced studies of stock market investors to date.
How does BECN’s operating cash flow stack up against its debt?
Over the past year, BECN has ramped up its debt from US$762m to US$2.6b , which accounts for long term debt. With this increase in debt, BECN’s cash and short-term investments stands at US$130m for investing into the business. Additionally, BECN has produced US$539m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 21%, meaning that BECN’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In BECN’s case, it is able to generate 0.21x cash from its debt capital.
Can BECN meet its short-term obligations with the cash in hand?
At the current liabilities level of US$1.5b, the company has been able to meet these obligations given the level of current assets of US$2.4b, with a current ratio of 1.59x. Generally, for Trade Distributors companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does BECN face the risk of succumbing to its debt-load?
With total debt exceeding equities, BECN is considered a highly levered company. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. 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 BECN’s case, the ratio of 2.19x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as BECN’s low interest coverage already puts the company at higher risk of default.
Next Steps:
Although BECN’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. Since there is also no concerns around BECN’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for BECN’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Beacon Roofing Supply to get a better picture of the mid-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for BECN’s future growth? Take a look at our free research report of analyst consensus for BECN’s outlook.
Valuation: What is BECN 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 BECN 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 editorial-team@simplywallst.com.
