Is Mueller Water Products Inc (NYSE:MWA) A Financially Sound Company?
Investors are always looking for growth in small-cap stocks like Mueller Water Products Inc (NYSE:MWA), with a market cap of US$1.6b. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into MWA here.
How does MWA’s operating cash flow stack up against its debt?
MWA has shrunken its total debt levels in the last twelve months, from US$484m to US$446m – this includes long-term debt. With this debt payback, MWA currently has US$347m remaining in cash and short-term investments , ready to deploy into the business. Moreover, MWA has generated cash from operations of US$133m over the same time period, resulting in an operating cash to total debt ratio of 30%, signalling that MWA’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In MWA’s case, it is able to generate 0.3x cash from its debt capital.
Does MWA’s liquid assets cover its short-term commitments?
With current liabilities at US$167m, it appears that the company has been able to meet these commitments with a current assets level of US$686m, leading to a 4.1x current account ratio. However, a ratio greater than 3x may be considered by some to be quite high, however this is not necessarily a negative for the company.
Is MWA’s debt level acceptable?
With a debt-to-equity ratio of 79%, MWA can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. 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 after interest and tax at least three times its net interest payments is considered financially sound. In MWA’s case, the ratio of 5.56x suggests that interest is appropriately 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.
Next Steps:
Although MWA’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 MWA’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 MWA has company-specific issues impacting its capital structure decisions. I suggest you continue to research Mueller Water Products to get a more holistic view of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for MWA’s future growth? Take a look at our free research report of analyst consensus for MWA’s outlook.
Valuation: What is MWA 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 MWA 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.
