While small-cap stocks, such as TopBuild Corp. (NYSE:BLD) with its market cap of US$2.5b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into BLD here.
Does BLD Produce Much Cash Relative To Its Debt?
Over the past year, BLD has ramped up its debt from US$242m to US$743m , which includes long-term debt. With this increase in debt, BLD's cash and short-term investments stands at US$101m , ready to be used for running the business. Moreover, BLD has produced US$167m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 22%, indicating that BLD’s operating cash is sufficient to cover its debt.
Can BLD meet its short-term obligations with the cash in hand?
At the current liabilities level of US$444m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.59x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Consumer Durables companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Does BLD face the risk of succumbing to its debt-load?
With debt reaching 69% of equity, BLD may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can check to see whether BLD 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 BLD's, case, the ratio of 8.02x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as BLD’s high interest coverage is seen as responsible and safe practice.
Although BLD’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 BLD's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how BLD has been performing in the past. You should continue to research TopBuild to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for BLD’s future growth? Take a look at our free research report of analyst consensus for BLD’s outlook.
- Valuation: What is BLD 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 BLD 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.
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 firstname.lastname@example.org. 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.