Is Meritage Homes Corporation’s (NYSE:MTH) Balance Sheet A Threat To Its Future?
Investors are always looking for growth in small-cap stocks like Meritage Homes Corporation (NYSE:MTH), with a market cap of US$1.76b. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Consumer Durables industry facing headwinds from current disruption, even ones that are profitable, tend to be high risk. Assessing first and foremost the financial health is essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, I know these factors are very high-level, so I recommend you dig deeper yourself into MTH here.
How much cash does MTH generate through its operations?
MTH’s debt level has been constant at around US$1.31b over the previous year comprising of short- and long-term debt. At this constant level of debt, MTH currently has US$169.4m remaining in cash and short-term investments , ready to deploy into the business. Additionally, MTH has produced US$33.2m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 2.5%, signalling that MTH’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In MTH’s case, it is able to generate 0.025x cash from its debt capital.
Does MTH’s liquid assets cover its short-term commitments?
Looking at MTH’s most recent US$328.6m liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 9.91x. However, a ratio greater than 3x may be considered as too high, as MTH could be holding too much capital in a low-return investment environment.
Can MTH service its debt comfortably?
With debt reaching 77.9% of equity, MTH 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 MTH’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 MTH, the ratio of 167x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as MTH’s high interest coverage is seen as responsible and safe practice.
Next Steps:
MTH’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. 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 MTH’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Meritage Homes to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for MTH’s future growth? Take a look at our free research report of analyst consensus for MTH’s outlook.
Valuation: What is MTH 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 MTH 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.
