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Matthews International Corporation (NASDAQ:MATW) is a small-cap stock with a market capitalization of US$1.3b. 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 essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. However, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into MATW here.
Does MATW produce enough cash relative to debt?
Over the past year, MATW has maintained its debt levels at around US$983m including long-term debt. At this constant level of debt, MATW’s cash and short-term investments stands at US$43m for investing into the business. Additionally, MATW has generated US$148m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 15%, meaning that MATW’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In MATW’s case, it is able to generate 0.15x cash from its debt capital.
Can MATW pay its short-term liabilities?
At the current liabilities level of US$301m, the company has been able to meet these obligations given the level of current assets of US$615m, with a current ratio of 2.04x. Usually, for Commercial Services companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is MATW’s debt level acceptable?
Since total debt levels have outpaced equities, MATW is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether MATW 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 MATW’s, case, the ratio of 3.43x 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 MATW’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. 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 MATW’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Matthews International to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for MATW’s future growth? Take a look at our free research report of analyst consensus for MATW’s outlook.
- Valuation: What is MATW 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 MATW 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.