While small-cap stocks, such as American CuMo Mining Corporation (TSXV:MLY) with its market cap of CA$10.66M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that MLY is not presently profitable, it’s essential to understand the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into MLY here.
How does MLY’s operating cash flow stack up against its debt?
MLY’s debt levels surged from CA$4.93M to CA$7.49M over the last 12 months , which comprises of short- and long-term debt. With this growth in debt, MLY’s cash and short-term investments stands at CA$1.48M , ready to deploy into the business. Moreover, MLY has produced CA$142.50K in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 1.90%, indicating that MLY’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency for unprofitable businesses as traditional metrics such as return on asset (ROA) requires positive earnings. In MLY’s case, it is able to generate 0.019x cash from its debt capital.
Can MLY pay its short-term liabilities?
Looking at MLY’s most recent CA$6.16M liabilities, the company is not able to meet these obligations given the level of current assets of CA$1.55M, with a current ratio of 0.25x below the prudent level of 3x.
Can MLY service its debt comfortably?With a debt-to-equity ratio of 50.86%, MLY can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since MLY is currently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
At its current level of cash flow coverage, MLY has room for improvement to better cushion for events which may require debt repayment. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven’t considered other factors such as how MLY has been performing in the past. I suggest you continue to research American CuMo Mining to get a better picture of the stock by looking at:
- 1. Historical Performance: What has MLY’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 2. 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.