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Investors are always looking for growth in small-cap stocks like Benchmark Electronics, Inc. (NYSE:BHE), with a market cap of US$1.2b. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Electronic industry, even ones that are profitable, tend to be high risk. Evaluating financial health as part of your investment thesis is essential. Here are few basic financial health checks you should consider before taking the plunge. Though, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into BHE here.
How does BHE’s operating cash flow stack up against its debt?
BHE has shrunken its total debt levels in the last twelve months, from US$212m to US$154m – this includes long-term debt. With this debt repayment, BHE’s cash and short-term investments stands at US$458m , ready to deploy into the business. Moreover, BHE has generated cash from operations of US$77m during the same period of time, resulting in an operating cash to total debt ratio of 50%, indicating that BHE’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In BHE’s case, it is able to generate 0.5x cash from its debt capital.
Can BHE meet its short-term obligations with the cash in hand?
At the current liabilities level of US$537m, it appears that the company has been able to meet these commitments with a current assets level of US$1.4b, leading to a 2.61x current account ratio. Generally, for Electronic companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Can BHE service its debt comfortably?
With debt at 14% of equity, BHE may be thought of as appropriately levered. BHE is not taking on too much debt commitment, which may be constraining for future growth. We can test if BHE’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 BHE, the ratio of 18.95x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as BHE’s high interest coverage is seen as responsible and safe practice.
BHE has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how BHE has been performing in the past. I suggest you continue to research Benchmark Electronics to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for BHE’s future growth? Take a look at our free research report of analyst consensus for BHE’s outlook.
- Valuation: What is BHE 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 BHE 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 email@example.com.