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Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as The Boston Beer Company, Inc. (NYSE:SAM) with a market-capitalization of US$4.6b, rarely draw their attention. However, history shows that overlooked mid-cap companies have performed better on a risk-adjusted manner than the smaller and larger segment of the market. Today we will look at SAM’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into SAM here.
Does SAM face the risk of succumbing to its debt-load?
A debt-to-equity ratio threshold varies depending on what industry the company operates, since some requires more debt financing than others. As a rule of thumb, a financially healthy mid-cap should have a ratio less than 40%. For Boston Beer Company, investors should not worry about its debt levels because the company has none! It has been operating its business with zero debt and utilising only its equity capital. Investors' risk associated with debt is virtually non-existent with SAM, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Can SAM meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, Boston Beer Company has no solvency issues, which is used to describe the company’s ability to meet its long-term obligations. But another important aspect of financial health is liquidity: the company’s ability to meet short-term obligations, including payments to suppliers and employees. With current liabilities at US$132m, it seems that the business has been able to meet these obligations given the level of current assets of US$261m, with a current ratio of 1.98x. The current ratio is calculated by dividing current assets by current liabilities. For Beverage companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
SAM has no debt in addition to ample cash to cover its near-term commitments. Its safe operations reduces risk for the company and its investors, but some degree of debt could also boost earnings growth and operational efficiency. Keep in mind I haven't considered other factors such as how SAM has performed in the past. I suggest you continue to research Boston Beer Company to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SAM’s future growth? Take a look at our free research report of analyst consensus for SAM’s outlook.
- Valuation: What is SAM 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 SAM 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.