How Financially Strong Is Masonite International Corporation (NYSE:DOOR)?
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Investors are always looking for growth in small-cap stocks like Masonite International Corporation (NYSE:DOOR), with a market cap of US$1.3b. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is essential, since poor capital management may bring about 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, this is not a comprehensive overview, so I suggest you dig deeper yourself into DOOR here.
Does DOOR Produce Much Cash Relative To Its Debt?
DOOR has built up its total debt levels in the last twelve months, from US$626m to US$931m – this includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at US$80m to keep the business going. Moreover, DOOR has produced US$195m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 21%, meaning that DOOR’s debt is appropriately covered by operating cash.
Does DOOR’s liquid assets cover its short-term commitments?
At the current liabilities level of US$246m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.73x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Building companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does DOOR face the risk of succumbing to its debt-load?
With total debt exceeding equity, DOOR 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 test if DOOR’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 DOOR, the ratio of 4.01x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving DOOR ample headroom to grow its debt facilities.
Next Steps:
DOOR’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for DOOR's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Masonite International to get a more holistic view of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for DOOR’s future growth? Take a look at our free research report of analyst consensus for DOOR’s outlook.
Valuation: What is DOOR 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 DOOR 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 editorial-team@simplywallst.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.
