Belden Inc. (NYSE:BDC): Time For A Financial Health Check

Simply Wall St

Sat, May 4, 2019, 8:28 AM

While small-cap stocks, such as Belden Inc. (NYSE:BDC) with its market cap of US$2.4b, 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 crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, these checks don't give you a full picture, so I’d encourage you to dig deeper yourself into BDC here.

BDC’s Debt (And Cash Flows)

Over the past year, BDC has reduced its debt from US$1.7b to US$1.5b , which also accounts for long term debt. With this debt payback, the current cash and short-term investment levels stands at US$339m to keep the business going. On top of this, BDC has generated cash from operations of US$327m over the same time period, leading to an operating cash to total debt ratio of 22%, signalling that BDC’s operating cash is sufficient to cover its debt.

Can BDC pay its short-term liabilities?

At the current liabilities level of US$572m, the company has been able to meet these obligations given the level of current assets of US$1.1b, with a current ratio of 1.97x. The current ratio is calculated by dividing current assets by current liabilities. For Electronic 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.

Is BDC’s debt level acceptable?

BDC is a highly-leveraged company with debt exceeding equity by over 100%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if BDC’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For BDC, the ratio of 5.15x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving BDC ample headroom to grow its debt facilities.

Next Steps:

Although BDC’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 BDC's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure BDC has company-specific issues impacting its capital structure decisions. I suggest you continue to research Belden to get a more holistic view of the small-cap by looking at: