Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Investors are always looking for growth in small-cap stocks like Steelcase Inc. (NYSE:SCS), with a market cap of US$2.0b. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. However, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into SCS here.
Does SCS produce enough cash relative to debt?
Over the past year, SCS has ramped up its debt from US$296m to US$321m , which accounts for long term debt. With this increase in debt, SCS’s cash and short-term investments stands at US$51m , ready to deploy into the business. On top of this, SCS has produced US$178m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 55%, indicating that SCS’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In SCS’s case, it is able to generate 0.55x cash from its debt capital.
Can SCS pay its short-term liabilities?
Looking at SCS’s US$637m in current liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.25x. For Commercial Services 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 SCS face the risk of succumbing to its debt-load?
With debt at 38% of equity, SCS may be thought of as appropriately levered. This range is considered safe as SCS is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether SCS 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 SCS’s, case, the ratio of 10.49x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving SCS ample headroom to grow its debt facilities.
SCS’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure SCS has company-specific issues impacting its capital structure decisions. I recommend you continue to research Steelcase to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SCS’s future growth? Take a look at our free research report of analyst consensus for SCS’s outlook.
- Valuation: What is SCS 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 SCS 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 email@example.com.