U.S. Markets closed

What Does Spectrum Brands Holdings, Inc.'s (NYSE:SPB) Balance Sheet Tell Us About It?

Simply Wall St

Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!

Spectrum Brands Holdings, Inc. (NYSE:SPB) is a small-cap stock with a market capitalization of US$2.6b. 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? 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. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, potential investors would need to take a closer look, and I suggest you dig deeper yourself into SPB here.

SPB’s Debt (And Cash Flows)

SPB has shrunk its total debt levels in the last twelve months, from US$5.3b to US$2.4b , which includes long-term debt. With this reduction in debt, SPB currently has US$176m remaining in cash and short-term investments to keep the business going. Moving on, operating cash flow was negative over the last twelve months. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of SPB’s operating efficiency ratios such as ROA here.

Can SPB pay its short-term liabilities?

With current liabilities at US$992m, it seems that the business has been able to meet these obligations given the level of current assets of US$1.6b, with a current ratio of 1.6x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Household Products companies, this is a reasonable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

NYSE:SPB Historical Debt, June 26th 2019

Can SPB service its debt comfortably?

Since total debt levels exceed equity, SPB is a highly leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if SPB’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 SPB, the ratio of 1.26x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.

Next Steps:

Although SPB’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. This is only a rough assessment of financial health, and I'm sure SPB has company-specific issues impacting its capital structure decisions. I suggest you continue to research Spectrum Brands Holdings to get a more holistic view of the small-cap by looking at:

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