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American Woodmark Corporation (NASDAQ:AMWD) is a small-cap stock with a market capitalization of US$1.4b. 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? 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. However, this is just a partial view of the stock, and I suggest you dig deeper yourself into AMWD here.
AMWD’s Debt (And Cash Flows)
AMWD has shrunk its total debt levels in the last twelve months, from US$814m to US$691m – this includes long-term debt. With this debt repayment, AMWD currently has US$59m remaining in cash and short-term investments , ready to be used for running the business. Moreover, AMWD has produced US$191m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 28%, indicating that AMWD’s current level of operating cash is high enough to cover debt.
Does AMWD’s liquid assets cover its short-term commitments?
With current liabilities at US$150m, the company has been able to meet these commitments with a current assets level of US$306m, leading to a 2.05x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. For Building 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.
Is AMWD’s debt level acceptable?
With total debt exceeding equity, AMWD is considered a highly levered company. 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 AMWD 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 AMWD's, case, the ratio of 4.03x suggests that interest is appropriately 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 AMWD’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 AMWD'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 AMWD has been performing in the past. You should continue to research American Woodmark to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AMWD’s future growth? Take a look at our free research report of analyst consensus for AMWD’s outlook.
- Valuation: What is AMWD 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 AMWD 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.