Maisons du Monde S.A. (EPA:MDM) is a small-cap stock with a market capitalization of €713m. 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? Companies operating in the Specialty Retail industry facing headwinds from current disruption, even ones that are profitable, are more likely to be higher risk. So, understanding the company’s financial health becomes vital. Here are few basic financial health checks you should consider before taking the plunge. However, I know these factors are very high-level, so I recommend you dig deeper yourself into MDM here.
How does MDM’s operating cash flow stack up against its debt?
Over the past year, MDM has reduced its debt from €280m to €252m , which includes long-term debt. With this debt repayment, MDM currently has €39m remaining in cash and short-term investments , ready to deploy into the business. Moreover, MDM has produced cash from operations of €117m over the same time period, leading to an operating cash to total debt ratio of 47%, meaning that MDM’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In MDM’s case, it is able to generate 0.47x cash from its debt capital.
Can MDM meet its short-term obligations with the cash in hand?
At the current liabilities level of €255m, it appears that the company has been able to meet these obligations given the level of current assets of €316m, with a current ratio of 1.24x. For Specialty Retail companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can MDM service its debt comfortably?
With debt reaching 48% of equity, MDM may be thought of as relatively highly levered. 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 MDM’s case, the ratio of 19.2x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
MDM’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how MDM has been performing in the past. I suggest you continue to research Maisons du Monde to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for MDM’s future growth? Take a look at our free research report of analyst consensus for MDM’s outlook.
- Valuation: What is MDM 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 MDM 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.