Investors are always looking for growth in small-cap stocks like American Woodmark Corporation (NASDAQ:AMWD), with a market cap of US$1.2b. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. 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’d encourage you to dig deeper yourself into AMWD here.
How does AMWD’s operating cash flow stack up against its debt?
AMWD has built up its total debt levels in the last twelve months, from US$18m to US$752m – this includes both the current and long-term debt. With this rise in debt, AMWD currently has US$57m remaining in cash and short-term investments for investing into the business. On top of this, AMWD has generated cash from operations of US$113m in the last twelve months, resulting in an operating cash to total debt ratio of 15%, indicating that AMWD’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 AMWD’s case, it is able to generate 0.15x cash from its debt capital.
Can AMWD pay its short-term liabilities?
With current liabilities at US$160m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.06x. For Building 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.
Does AMWD face the risk of succumbing to its debt-load?
Since total debt levels have outpaced equities, AMWD is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether AMWD is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In AMWD’s, case, the ratio of 6.06x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as AMWD’s high interest coverage is seen as responsible and safe practice.
At its current level of cash flow coverage, AMWD has room for improvement to better cushion for events which may require debt repayment. However, 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 AMWD’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research American Woodmark to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AMWD’s future growth? Take a look at our free research report of analyst consensus for AMWD’s outlook.
- Valuation: What is AMWD 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 AMWD 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 firstname.lastname@example.org.