2020 was a brutal year for many retail chains. One of the ones that didn’t make it was Stein Mart, and in August the 112-year-old company ended up filing for bankruptcy. Although it isn’t always easy to determine the overall financial health of a company, there are some ratios investors can look at to try and avoid investing in a company that will end up going bankrupt.
Two of the ratios I use the most are the debt-to-equity ratio, and the quick ratio. The debt-to-equity ratio is a company’s total liabilities divided by its total shareholder equity, and is used to determine the company’s financial leverage. The quick ratio, is a company’s current assets (excluding inventory) divided by its current liabilities, and is used to determine the company’s ability to pay its current bills without needing to sell inventory or obtain additional financing. While there are other methods and ratios out there that can help determine a company’s financial health, these are the two that I typically use so I decided I’d take a closer look at them and how they looked before Stein Mart went bankrupt.
One of the things I like the most about Morningstar is how easy it is to look at a company’s financial statements over time. While most financial websites will show you the current picture (ie. the P/E ratio for a company), sometimes it helps to look at how the company performed over the last 3, 5, or even 10 years. This is especially true when you are looking at a company’s financial health. While the stock ticker for Stein Mart might not be on the website much longer, it currently is so let’s take a look at these ratios to see how the company was doing over the last few years.
The first thing you will want to do once you are on Morningstar’s site is put the stock ticker into the search field in the upper left corner of the site and hit enter. In this case, the ticker for Stein Mart is SMRTQ. Once you do that you will want to select the Key Ratios tab and then hit Full Key Ratios Data:
On the next screen you will want to scroll to the bottom of the page and then hit the Financial Health tab. Once you do that you should see something like this:
Looking at the quick ratio over the last 10 years we can see the company was never above 1. As a reminder a number above 1 would indicate that a company is able to pay its current bills with its current cash and cash equivalents. We can also see that after 2015 things started looking very bad, and the debt-to-equity ratio increased every year for the last 5 years and ended with a very big jump in 2020. This indicates that the company was financing its operations through debt more and more as time went on.
Please keep in mind hindsight is always 20/20, and it’s easy to look back and say the writing was on the wall. I would also like to point out that I have never owned or considered owning Stein Mart stock, but if I was the fact that the quick ratio was below 1 would have been a red flag. The fact that it was going down every year would be another one. I probably would have passed at that point, but the other thing that stands out is the debt-to-equity ratio increasing over time.
Looking at a company’s financial health is important if you are considering investing in it, especially in times of uncertainty. While the the debt-to-equity ratio and the quick ratio aren’t going to tell you the entire story about a company, looking at them before deciding to invest is usually a good idea.