Investors are always looking for growth in small-cap stocks like Eagle Materials Inc. (NYSE:EXP), with a market cap of US$4.1b. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is crucial, 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 recommend you dig deeper yourself into EXP here.
Does EXP Produce Much Cash Relative To Its Debt?
Over the past year, EXP has ramped up its debt from US$566m to US$626m – this includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at US$17m , ready to be used for running the business. Additionally, EXP has produced cash from operations of US$357m during the same period of time, resulting in an operating cash to total debt ratio of 57%, signalling that EXP’s debt is appropriately covered by operating cash.
Does EXP’s liquid assets cover its short-term commitments?
With current liabilities at US$181m, it appears that the company has been able to meet these commitments with a current assets level of US$409m, leading to a 2.26x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Basic Materials companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can EXP service its debt comfortably?
EXP is a relatively highly levered company with a debt-to-equity of 44%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. 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 before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In EXP's case, the ratio of 11.4x suggests that interest is comfortably 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.
Although EXP’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 EXP has company-specific issues impacting its capital structure decisions. You should continue to research Eagle Materials to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for EXP’s future growth? Take a look at our free research report of analyst consensus for EXP’s outlook.
- Valuation: What is EXP 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 EXP 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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