Is Masonite International Corporation (NYSE:DOOR) A Financially Sound Company?
While small-cap stocks, such as Masonite International Corporation (NYSE:DOOR) with its market cap of US$1.8b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into DOOR here.
How much cash does DOOR generate through its operations?
DOOR has built up its total debt levels in the last twelve months, from US$477m to US$626m , which comprises of short- and long-term debt. With this growth in debt, the current cash and short-term investment levels stands at US$30m for investing into the business. On top of this, DOOR has produced cash from operations of US$214m over the same time period, leading to an operating cash to total debt ratio of 34%, signalling that DOOR’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In DOOR’s case, it is able to generate 0.34x cash from its debt capital.
Does DOOR’s liquid assets cover its short-term commitments?
At the current liabilities level of US$250m liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.51x. For Building 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.
Does DOOR face the risk of succumbing to its debt-load?
With debt reaching 88% of equity, DOOR may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if DOOR’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For DOOR, the ratio of 5.18x 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.
Next Steps:
DOOR’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. Keep in mind I haven’t considered other factors such as how DOOR has been performing in the past. I recommend you continue to research Masonite International to get a better picture of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for DOOR’s future growth? Take a look at our free research report of analyst consensus for DOOR’s outlook.
Valuation: What is DOOR 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 DOOR 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 editorial-team@simplywallst.com.
