Investors are always looking for growth in small-cap stocks like Schweitzer-Mauduit International Inc (NYSE:SWM), with a market cap of US$1.0b. 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. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into SWM here.
Does SWM produce enough cash relative to debt?
SWM’s debt levels have fallen from US$694m to US$641m over the last 12 months – this includes both the current and long-term debt. With this debt payback, SWM currently has US$91m remaining in cash and short-term investments , ready to deploy into the business. Moreover, SWM has generated cash from operations of US$131m over the same time period, leading to an operating cash to total debt ratio of 20%, meaning that SWM’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 SWM’s case, it is able to generate 0.2x cash from its debt capital.
Does SWM’s liquid assets cover its short-term commitments?
Looking at SWM’s most recent US$136m liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.09x. However, anything above 3x may be considered excessive by some investors. They might argue SWM is leaving too much capital in low-earning investments.
Does SWM face the risk of succumbing to its debt-load?
With total debt exceeding equities, SWM is considered a highly levered company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether SWM 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 SWM’s, case, the ratio of 4.89x 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.
At its current level of cash flow coverage, SWM 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 SWM’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Schweitzer-Mauduit International to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SWM’s future growth? Take a look at our free research report of analyst consensus for SWM’s outlook.
- Valuation: What is SWM 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 SWM 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.