Mid-caps stocks, like Bemis Company Inc (NYSE:BMS) with a market capitalization of $4.31B, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. I’ve put together a small checklist, which I believe provides a ballpark estimate of their financial health status. Check out our latest analysis for Bemis Company
Does BMS face the risk of succumbing to its debt-load?
Debt-to-equity ratio tells us how much of the asset debtors could claim if the company went out of business. BMS’s debt-to-equity ratio exceeds 100%, which means that it is a highly leveraged company. This is not a problem if the company has consistently grown its profits. But during a business downturn, availability of cash may dry up, making it hard to operate. We can test if BMS’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings (EBIT) should cover interest by at least three times, therefore reducing concerns when profit is highly volatile. BMS’s profits amply covers interest at 6.31 times, which is seen as relatively safe. This means lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Does BMS’s liquid assets cover its short-term commitments?
Debt to equity ratio is an important aspect of financial strength. But if the company has a substantial amount of cash on its balance sheet, that should allay some fear of a debt overhang and increase the chance of meeting upcoming liabilities. We need to assess BMS’s cash and other liquid assets against its upcoming expenses. Our analysis shows that BMS is able to meet its upcoming commitments with its cash and other short-term assets, which lessens our concerns for the company’s business operations should any unfavourable circumstances arise.
Are you a shareholder? BMS’s high debt level shouldn’t be an impetus for investors to sell given its high operating cash flow seems adequate to meet obligations which means its debt is being put to good use. Given that BMS’s financial position may change over time, I encourage examining market expectations for BMS’s future growth on our free analysis platform.
Are you a potential investor? Although investors should analyse the serviceability of debt, it shouldn’t be viewed in isolation of other factors. Ultimately, debt is often used to fund or accelerate new projects that are expected to improve a company’s growth trajectory in the longer term. BMS’s Return on Capital Employed (ROCE) in order to see management’s track record at deploying funds in high-returning projects.
To help readers see pass 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.