Matthews International Corporation (NASDAQ:MATW) is a small-cap stock with a market capitalization of US$1.88b. 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 vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into MATW here.
How does MATW’s operating cash flow stack up against its debt?
MATW’s debt level has been constant at around US$911.16m over the previous year made up of current and long term debt. At this constant level of debt, MATW currently has US$58.61m remaining in cash and short-term investments , ready to deploy into the business. Moreover, MATW has produced US$149.30m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 16.39%, meaning that MATW’s current level of operating cash is not high enough to cover debt. 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 0.16x cash from its debt capital.
Does MATW’s liquid assets cover its short-term commitments?
With current liabilities at US$285.13m, the company has been able to meet these commitments with a current assets level of US$595.06m, leading to a 2.09x current account ratio. For Commercial Services companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Can MATW service its debt comfortably?
With total debt exceeding equities, MATW is considered a highly levered company. 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 MATW’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 MATW, the ratio of 3.96x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as MATW’s high interest coverage is seen as responsible and safe practice.
MATW’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. 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 more holistic view of the stock 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 pass 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.