McMillan Shakespeare Limited (ASX:MMS) is a small-cap stock with a market capitalization of AU$1.1b. 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. Why is it important? So, understanding the company’s financial health becomes crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, I know these factors are very high-level, so I suggest you dig deeper yourself into MMS here.
Does MMS produce enough cash relative to debt?
MMS’s debt level has been constant at around AU$338m over the previous year – this includes long-term debt. At this constant level of debt, MMS’s cash and short-term investments stands at AU$100m , ready to deploy into the business. Moreover, MMS has generated AU$118m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 35%, indicating that MMS’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In MMS’s case, it is able to generate 0.35x cash from its debt capital.
Does MMS’s liquid assets cover its short-term commitments?
Looking at MMS’s AU$150m in current liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.08x. Usually, for Professional Services companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is MMS’s debt level acceptable?
MMS is a relatively highly levered company with a debt-to-equity of 91%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether MMS is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In MMS’s, case, the ratio of 14.37x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as MMS’s high interest coverage is seen as responsible and safe practice.
Although MMS’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for MMS’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research McMillan Shakespeare to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for MMS’s future growth? Take a look at our free research report of analyst consensus for MMS’s outlook.
- Valuation: What is MMS 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 MMS 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.