While small-cap stocks, such as Southwest Gas Holdings, Inc. (NYSE:SWX) with its market cap of US$4.4b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, these checks don't give you a full picture, so I suggest you dig deeper yourself into SWX here.
SWX’s Debt (And Cash Flows)
SWX has built up its total debt levels in the last twelve months, from US$2.0b to US$2.3b , which accounts for long term debt. With this increase in debt, SWX currently has US$85m remaining in cash and short-term investments to keep the business going. Additionally, SWX has produced cash from operations of US$529m during the same period of time, resulting in an operating cash to total debt ratio of 23%, indicating that SWX’s current level of operating cash is high enough to cover debt.
Does SWX’s liquid assets cover its short-term commitments?
With current liabilities at US$939m, it appears that the company may not have an easy time meeting these commitments with a current assets level of US$840m, leading to a current ratio of 0.89x. The current ratio is calculated by dividing current assets by current liabilities.
Does SWX face the risk of succumbing to its debt-load?
SWX is a relatively highly levered company with a debt-to-equity of 98%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can check to see whether SWX 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 SWX's, case, the ratio of 3.79x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as SWX’s high interest coverage is seen as responsible and safe practice.
Although SWX’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. However, its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I'm sure SWX has company-specific issues impacting its capital structure decisions. You should continue to research Southwest Gas Holdings to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SWX’s future growth? Take a look at our free research report of analyst consensus for SWX’s outlook.
- Historical Performance: What has SWX's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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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