Are Martinrea International Inc’s (TSE:MRE) Interest Costs Too High?

While small-cap stocks, such as Martinrea International Inc (TSE:MRE) with its market cap of CA$1.22b, 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. I believe these basic checks tell most of the story you need to know. However, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into MRE here.

How does MRE’s operating cash flow stack up against its debt?

MRE has sustained its debt level by about CA$680.1m over the last 12 months made up of current and long term debt. At this stable level of debt, the current cash and short-term investment levels stands at CA$75.3m , ready to deploy into the business. Additionally, MRE has produced CA$275.5m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 40.5%, meaning that MRE’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In MRE’s case, it is able to generate 0.41x cash from its debt capital.

Does MRE’s liquid assets cover its short-term commitments?

At the current liabilities level of CA$845.1m liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.35x. Usually, for Auto Components companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

TSX:MRE Historical Debt September 14th 18
TSX:MRE Historical Debt September 14th 18

Can MRE service its debt comfortably?

MRE is a relatively highly levered company with a debt-to-equity of 61.6%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. 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 after interest and tax at least three times its net interest payments is considered financially sound. In MRE’s case, the ratio of 11.13x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as MRE’s high interest coverage is seen as responsible and safe practice.

Next Steps:

Although MRE’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 MRE’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Martinrea International to get a more holistic view of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for MRE’s future growth? Take a look at our free research report of analyst consensus for MRE’s outlook.
  2. Valuation: What is MRE 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 MRE is currently mispriced by the market.
  3. 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