Is Commercial Metals Company (NYSE:CMC) A Financially Sound Company?
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While small-cap stocks, such as Commercial Metals Company (NYSE:CMC) with its market cap of US$1.7b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. However, potential investors would need to take a closer look, and I recommend you dig deeper yourself into CMC here.
CMC’s Debt (And Cash Flows)
CMC has built up its total debt levels in the last twelve months, from US$819m to US$1.4b , which accounts for long term debt. With this rise in debt, the current cash and short-term investment levels stands at US$67m to keep the business going. We note it produced negative cash flow over the last twelve months. For this article’s sake, I won’t be looking at this today, but you can take a look at some of CMC’s operating efficiency ratios such as ROA here.
Can CMC meet its short-term obligations with the cash in hand?
At the current liabilities level of US$752m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.75x. The current ratio is calculated by dividing current assets by current liabilities. For Metals and Mining companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.
Does CMC face the risk of succumbing to its debt-load?
With debt reaching 93% of equity, CMC may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. 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 CMC's case, the ratio of 4.33x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving CMC ample headroom to grow its debt facilities.
Next Steps:
Although CMC’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around CMC'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 CMC has been performing in the past. You should continue to research Commercial Metals to get a better picture of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for CMC’s future growth? Take a look at our free research report of analyst consensus for CMC’s outlook.
Valuation: What is CMC 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 CMC 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 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.
