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Mid-caps stocks, like Spectrum Brands Holdings, Inc. (NYSE:SPB) with a market capitalization of US$2.6b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. Today we will look at SPB’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into SPB here.
SPB’s Debt (And Cash Flows)
SPB's debt levels have fallen from US$5.3b to US$2.4b over the last 12 months , which also accounts for long term debt. With this reduction in debt, SPB's cash and short-term investments stands at US$176m to keep the business going. Moving on, operating cash flow was negative over the last twelve months. For this article’s sake, I won’t be looking at this today, but you can assess some of SPB’s operating efficiency ratios such as ROA here.
Does SPB’s liquid assets cover its short-term commitments?
With current liabilities at US$992m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.6x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Household Products companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Can SPB service its debt comfortably?
With total debt exceeding equity, SPB is considered a highly levered company. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether SPB 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 SPB's, case, the ratio of 1.26x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
SPB’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven't considered other factors such as how SPB has been performing in the past. You should continue to research Spectrum Brands Holdings to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SPB’s future growth? Take a look at our free research report of analyst consensus for SPB’s outlook.
- Valuation: What is SPB 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 SPB 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.