MSA Safety Incorporated (NYSE:MSA) is a small-cap stock with a market capitalization of US$4.0b. 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, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, this is just a partial view of the stock, and I’d encourage you to dig deeper yourself into MSA here.
MSA’s Debt (And Cash Flows)
MSA has shrunk its total debt levels in the last twelve months, from US$475m to US$361m , which includes long-term debt. With this debt payback, MSA currently has US$195m remaining in cash and short-term investments to keep the business going. Additionally, MSA has produced cash from operations of US$264m in the last twelve months, leading to an operating cash to total debt ratio of 73%, signalling that MSA’s current level of operating cash is high enough to cover debt.
Can MSA meet its short-term obligations with the cash in hand?
At the current liabilities level of US$282m, it seems that the business has been able to meet these obligations given the level of current assets of US$657m, with a current ratio of 2.33x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Commercial Services companies, this is a reasonable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is MSA’s debt level acceptable?
MSA is a relatively highly levered company with a debt-to-equity of 57%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. 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 MSA's case, the ratio of 16.75x suggests that interest is comfortably covered, which means that lenders may be willing to lend out more funding as MSA’s high interest coverage is seen as responsible and safe practice.
Although MSA’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. 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 MSA's financial health. Other important fundamentals need to be considered alongside. You should continue to research MSA Safety to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for MSA’s future growth? Take a look at our free research report of analyst consensus for MSA’s outlook.
- Valuation: What is MSA 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 MSA 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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