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Schweitzer-Mauduit International, Inc. (NYSE:SWM) is a small-cap stock with a market capitalization of US$1.1b. 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? Evaluating financial health as part of your investment thesis is crucial, since poor capital management may bring about 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 SWM here.
SWM’s Debt (And Cash Flows)
SWM's debt levels have fallen from US$684m to US$622m over the last 12 months , which also accounts for long term debt. With this debt repayment, the current cash and short-term investment levels stands at US$94m , ready to be used for running the business. Additionally, SWM has produced cash from operations of US$139m during the same period of time, resulting in an operating cash to total debt ratio of 22%, indicating that SWM’s current level of operating cash is high enough to cover debt.
Does SWM’s liquid assets cover its short-term commitments?
With current liabilities at US$144m, it seems that the business has been able to meet these commitments with a current assets level of US$429m, leading to a 2.99x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Forestry companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Does SWM face the risk of succumbing to its debt-load?
Since total debt levels exceed equity, SWM is a highly leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In SWM's case, the ratio of 4.85x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as SWM’s high interest coverage is seen as responsible and safe practice.
Although SWM’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 SWM's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure SWM has company-specific issues impacting its capital structure decisions. You should continue to research Schweitzer-Mauduit International to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SWM’s future growth? Take a look at our free research report of analyst consensus for SWM’s outlook.
- Valuation: What is SWM 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 SWM 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.