Investors are always looking for growth in small-cap stocks like Barnes Group Inc. (NYSE:B), with a market cap of US$2.8b. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, these checks don't give you a full picture, so I’d encourage you to dig deeper yourself into B here.
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B’s Debt (And Cash Flows)
B's debt levels surged from US$521m to US$940m over the last 12 months – this includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at US$104m , ready to be used for running the business. Moreover, B has produced US$260m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 28%, indicating that B’s operating cash is sufficient to cover its debt.
Can B meet its short-term obligations with the cash in hand?
Looking at B’s US$369m in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$797m, with a current ratio of 2.16x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Machinery 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.
Can B service its debt comfortably?
With debt reaching 77% of equity, B may be thought of as relatively highly levered. 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 B 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 B's, case, the ratio of 12.73x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving B ample headroom to grow its debt facilities.
B’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. Keep in mind I haven't considered other factors such as how B has been performing in the past. I suggest you continue to research Barnes Group to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for B’s future growth? Take a look at our free research report of analyst consensus for B’s outlook.
- Valuation: What is B 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 B 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.
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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.