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Stocks with market capitalization between $2B and $10B, such as Eagle Materials Inc. (NYSE:EXP) with a size of US$3.8b, do not attract as much attention from the investing community as do the small-caps and large-caps. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. This article will examine EXP’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into EXP here.
EXP’s Debt (And Cash Flows)
EXP has built up its total debt levels in the last twelve months, from US$621m to US$692m , which includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at US$8.6m to keep the business going. Additionally, EXP has generated cash from operations of US$350m during the same period of time, resulting in an operating cash to total debt ratio of 51%, meaning that EXP’s debt is appropriately covered by operating cash.
Can EXP pay its short-term liabilities?
At the current liabilities level of US$179m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.38x. The current ratio is the number you get when you divide current assets by current liabilities. For Basic Materials companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.
Can EXP service its debt comfortably?
EXP is a relatively highly levered company with a debt-to-equity of 57%. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether EXP 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 EXP's, case, the ratio of 10.63x 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.
EXP’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. Since there is also no concerns around EXP's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure EXP has company-specific issues impacting its capital structure decisions. I suggest you continue to research Eagle Materials to get a better picture of the mid-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.
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 email@example.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.