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Beacon Roofing Supply, Inc. (NASDAQ:BECN) is a small-cap stock with a market capitalization of US$2.6b. 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? Since BECN is loss-making right now, it’s essential to assess the current state of its operations and pathway to profitability. The following basic checks can help you get a picture of the company's balance sheet strength. However, potential investors would need to take a closer look, and I recommend you dig deeper yourself into BECN here.
BECN’s Debt (And Cash Flows)
Over the past year, BECN has maintained its debt levels at around US$2.9b – this includes long-term debt. At this stable level of debt, BECN currently has US$645k remaining in cash and short-term investments , ready to be used for running the business. On top of this, BECN has generated cash from operations of US$257m during the same period of time, leading to an operating cash to total debt ratio of 8.8%, meaning that BECN’s operating cash is less than its debt.
Can BECN meet its short-term obligations with the cash in hand?
At the current liabilities level of US$984m, the company has been able to meet these obligations given the level of current assets of US$2.2b, with a current ratio of 2.27x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Trade Distributors companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Does BECN face the risk of succumbing to its debt-load?
With total debt exceeding equity, BECN is considered a highly levered company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. Though, since BECN is currently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Although BECN’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 BECN's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for BECN's financial health. Other important fundamentals need to be considered alongside. You should continue to research Beacon Roofing Supply to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for BECN’s future growth? Take a look at our free research report of analyst consensus for BECN’s outlook.
- Valuation: What is BECN 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 BECN 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 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.