MSC Industrial Direct Co., Inc. (NYSE:MSM): Financial Strength Analysis
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Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like MSC Industrial Direct Co., Inc. (NYSE:MSM), with a market cap of US$4.5b, are often out of the spotlight. However, history shows that overlooked mid-cap companies have performed better on a risk-adjusted manner than the smaller and larger segment of the market. This article will examine MSM’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Don’t forget that this is a general and concentrated examination of MSC Industrial Direct’s financial health, so you should conduct further analysis into MSM here.
Check out our latest analysis for MSC Industrial Direct
How much cash does MSM generate through its operations?
MSM has built up its total debt levels in the last twelve months, from US$493m to US$523m , which accounts for long term debt. With this rise in debt, MSM currently has US$12m remaining in cash and short-term investments , ready to deploy into the business. Additionally, MSM has produced cash from operations of US$335m during the same period of time, resulting in an operating cash to total debt ratio of 64%, signalling that MSM’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In MSM’s case, it is able to generate 0.64x cash from its debt capital.
Does MSM’s liquid assets cover its short-term commitments?
Looking at MSM’s US$477m in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.37x. For Trade Distributors 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.
Is MSM’s debt level acceptable?
With a debt-to-equity ratio of 38%, MSM’s debt level may be seen as prudent. This range is considered safe as MSM is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if MSM’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 MSM, the ratio of 31.39x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving MSM ample headroom to grow its debt facilities.
Next Steps:
MSM has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for MSM’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research MSC Industrial Direct to get a more holistic view of the stock 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.
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.
