Mueller Water Products, Inc. (NYSE:MWA) is a small-cap stock with a market capitalization of US$1.5b. 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 crucial, 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. Nevertheless, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into MWA here.
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Does MWA Produce Much Cash Relative To Its Debt?
MWA's debt levels have fallen from US$480m to US$446m over the last 12 months , which also accounts for long term debt. With this debt repayment, MWA's cash and short-term investments stands at US$134m to keep the business going. Moreover, MWA has generated US$102m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 23%, indicating that MWA’s operating cash is sufficient to cover its debt.
Can MWA pay its short-term liabilities?
Looking at MWA’s US$174m in current liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$535m, leading to a 3.07x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Having said that, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.
Is MWA’s debt level acceptable?
MWA is a relatively highly levered company with a debt-to-equity of 81%. 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 MWA 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 MWA's, case, the ratio of 5.42x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as MWA’s high interest coverage is seen as responsible and safe practice.
MWA’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 MWA's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Mueller Water Products to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for MWA’s future growth? Take a look at our free research report of analyst consensus for MWA’s outlook.
- Valuation: What is MWA 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 MWA 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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