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Is Worthington Industries, Inc.’s (NYSE:WOR) Balance Sheet A Threat To Its Future?

Simply Wall St

Investors are always looking for growth in small-cap stocks like Worthington Industries, Inc. (NYSE:WOR), with a market cap of US$1.9b. However, an important fact which most ignore is: how financially healthy is the business? 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. Let’s work through some financial health checks you may wish to consider if you’re interested in this stock. However, potential investors would need to take a closer look, and I recommend you dig deeper yourself into WOR here.

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WOR’s Debt (And Cash Flows)

WOR has sustained its debt level by about US$749m over the last 12 months – this includes long-term debt. At this constant level of debt, WOR currently has US$113m remaining in cash and short-term investments , ready to be used for running the business. Moreover, WOR has generated cash from operations of US$206m during the same period of time, resulting in an operating cash to total debt ratio of 27%, signalling that WOR’s operating cash is sufficient to cover its debt.

Does WOR’s liquid assets cover its short-term commitments?

With current liabilities at US$565m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.13x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Metals and Mining companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

NYSE:WOR Historical Debt, March 24th 2019

Is WOR’s debt level acceptable?

With a debt-to-equity ratio of 77%, WOR can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In WOR’s case, the ratio of 4.17x 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.

Next Steps:

WOR’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. Since there is also no concerns around WOR’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how WOR has been performing in the past. You should continue to research Worthington Industries to get a more holistic view of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for WOR’s future growth? Take a look at our free research report of analyst consensus for WOR’s outlook.
  2. Valuation: What is WOR 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 WOR is currently mispriced by the market.
  3. 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 editorial-team@simplywallst.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.