MSC Industrial Direct Co., Inc. (NYSE:MSM) is a small-cap stock with a market capitalization of US$4.5b. 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? Assessing first and foremost the financial health is essential, since poor capital management may bring about 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. Nevertheless, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into MSM here.
MSM’s Debt (And Cash Flows)
Over the past year, MSM has ramped up its debt from US$511m to US$593m , which includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at US$58m , ready to be used for running the business. Additionally, MSM has generated US$320m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 54%, meaning that MSM’s operating cash is sufficient to cover its debt.
Does MSM’s liquid assets cover its short-term commitments?
At the current liabilities level of US$568m, it seems that the business has been able to meet these obligations given the level of current assets of US$1.2b, with a current ratio of 2.19x. The current ratio is the number you get when you divide current assets by current liabilities. For Trade Distributors companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is MSM’s debt level acceptable?
With debt reaching 42% of equity, MSM may be thought of as relatively highly levered. 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 MSM's case, the ratio of 29.54x suggests that interest is comfortably 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.
Although MSM’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 MSM'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 MSM has company-specific issues impacting its capital structure decisions. You should continue to research MSC Industrial Direct to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for MSM’s future growth? Take a look at our free research report of analyst consensus for MSM’s outlook.
- Valuation: What is MSM 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 MSM 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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