Investors are always looking for growth in small-cap stocks like BMC Stock Holdings, Inc. (NASDAQ:BMCH), with a market cap of US$1.2b. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We’ll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, these checks don’t give you a full picture, so I’d encourage you to dig deeper yourself into BMCH here.
Does BMCH Produce Much Cash Relative To Its Debt?
BMCH has sustained its debt level by about US$361m over the last 12 months including long-term debt. At this constant level of debt, BMCH’s cash and short-term investments stands at US$151m , ready to be used for running the business. Moreover, BMCH has generated cash from operations of US$210m during the same period of time, resulting in an operating cash to total debt ratio of 58%, signalling that BMCH’s debt is appropriately covered by operating cash.
Can BMCH pay its short-term liabilities?
At the current liabilities level of US$296m, the company has been able to meet these obligations given the level of current assets of US$847m, with a current ratio of 2.86x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Trade Distributors 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.
Is BMCH’s debt level acceptable?
BMCH is a relatively highly levered company with a debt-to-equity of 41%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether BMCH is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In BMCH’s, case, the ratio of 7.26x 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.
BMCH’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. This is only a rough assessment of financial health, and I’m sure BMCH has company-specific issues impacting its capital structure decisions. You should continue to research BMC Stock Holdings to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for BMCH’s future growth? Take a look at our free research report of analyst consensus for BMCH’s outlook.
- Valuation: What is BMCH 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 BMCH 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.
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