Is Marlin Gold Mining Ltd’s (TSXV:MLN) Balance Sheet A Threat To Its Future?

Marlin Gold Mining Ltd (TSXV:MLN) is a small-cap-stock with a market capitalization of USD $88 Million. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. There are always disruptions which destabilize and many a times end an existing industry, and most small-cap companies are the first casualties when such a wave hits.

Apart from geopolitical events such as political unrest and natural calamities, a company which is suddenly facing a hostile market environment must be able to fulfil short-term commitments with its reserves so that it can see another day. Thus, it becomes utmost important for an investor to test a company’s resilience for such contingencies. In simple terms, I believe these three small calculations tell most of the story you need to know. Check out our latest analysis for Marlin Gold Mining

Does MLN generate enough cash through operations to meet all its needs?

While in short-term operating cash flows can be volatile, on an annual basis, they reflect the true picture of a company’s earnings quality and its ability to meet obligations. In the case of Marlin Gold Mining, operating cash flow turned out to be -24.1% of its overall debt over the past twelve months. This indicates that currently Marlin Gold Mining’s expenses exceed revenues. While that can be acceptable for a fast-growing company scaling its business, for a more mature company, these are signs of trouble ahead.

Marlin Gold Mining (TSXV:MLN) Historical Debt Apr 6th 17
Marlin Gold Mining (TSXV:MLN) Historical Debt Apr 6th 17

Can MLN meet its short-term obligations with the cash in hand?

There are many problems that come unannounced. For instance, a hurricane or even labor strikes. In 2011, a Tsunami and earthquake in Japan had wiped out a significant chunk of auto supply chain in the country. If these were not Japan’s biggest automakers and electronics-maker with big cash reserves and funding sources, it’s hard to imagine how would they have recovered. However, banks, creditors, wages, and commitment to suppliers do not go away even during an extreme event. So, a company must maintain enough liquidity to meet its short-term obligations to survive. Marlin Gold Mining is able to meet its short term (1 year) commitments with its holdings of cash and other short term assets.

Marlin Gold Mining (TSXV:MLN) Net Worth Apr 6th 17
Marlin Gold Mining (TSXV:MLN) Net Worth Apr 6th 17

Is Marlin Gold Mining’s level of debt at an acceptable level?

While ideally I reckon the debt-to equity ratio of a financially healthy company to be less than 40%, several factors such as industry life-cycle and economic conditions can result in a company raising a significant amount of debt. For Marlin Gold Mining, the debt to equity ratio is 250.3% and this means that Marlin Gold Mining is a highly leveraged company, which can be fine if the company has consistently improved its Return on Equity. But a business downturn may dry up its liquidity, making it hard to operate. While debt-to-equity ratio has several factors at play, an easier way to check whether it’s at a sustainable level is to check its ability to service the debt. A company generating earnings at least 5x of its interest payments is considered financially sound. In addition, with such a coverage ratio, the earnings remain more stable. In MLN’s case the company is making a loss, therefore interest on debt is not well covered by earnings.

Conclusion

With a high level of debt on its balance sheet, Marlin Gold Mining could still be in a financially strong position if it’s operating cash flows and earnings stack up. In this case, Marlin Gold Mining’s cash flows and earnings tell a different story. It needs to do a lot of work on its profitability and operational efficiency to be designated as a financially sound company.

Now when you know whether you should keep the debt in mind as a risk factor when putting together your investment thesis, I recommend you check out our latest free analysis report on Marlin Gold Mining to see what are MLN’s growth prospects and whether it could be considered an undervalued opportunity.

PS. If you are not interested in Marlin Gold Mining anymore, you can use our free platform to see my list of over 150 other stocks with a high growth potential.