Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as Eagle Materials Inc (NYSE:EXP) with a market-capitalization of US$3.4b, rarely draw their attention. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. 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. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into EXP here.
How much cash does EXP generate through its operations?
EXP’s debt level has been constant at around US$631m over the previous year – this includes both the current and long-term debt. At this constant level of debt, EXP currently has US$10m remaining in cash and short-term investments for investing into the business. On top of this, EXP has generated cash from operations of US$360m in the last twelve months, leading to an operating cash to total debt ratio of 57%, signalling that EXP’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In EXP’s case, it is able to generate 0.57x cash from its debt capital.
Can EXP meet its short-term obligations with the cash in hand?
Looking at EXP’s most recent US$155m liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.83x. Generally, for Basic Materials companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Is EXP’s debt level acceptable?
With debt reaching 44% of equity, EXP may be thought of as relatively highly levered. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if EXP’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 EXP, the ratio of 12.24x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as EXP’s high interest coverage is seen as responsible and safe practice.
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. Keep in mind I haven’t considered other factors such as how EXP has been performing in the past. I recommend you continue to research Eagle Materials to get a more holistic view 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.