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Investors are always looking for growth in small-cap stocks like Michelmersh Brick Holdings plc (LON:MBH), with a market cap of UK£77m. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is vital, 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. Though, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into MBH here.
How much cash does MBH generate through its operations?
MBH has shrunken its total debt levels in the last twelve months, from UK£27m to UK£21m – this includes long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at UK£2.6m , ready to deploy into the business. Additionally, MBH has produced cash from operations of UK£6.1m in the last twelve months, resulting in an operating cash to total debt ratio of 29%, indicating that MBH’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In MBH’s case, it is able to generate 0.29x cash from its debt capital.
Can MBH meet its short-term obligations with the cash in hand?
Looking at MBH’s UK£11m in current liabilities, the company has been able to meet these obligations given the level of current assets of UK£22m, with a current ratio of 2.09x. For Basic Materials companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Can MBH service its debt comfortably?
MBH’s level of debt is appropriate relative to its total equity, at 34%. This range is considered safe as MBH is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether MBH 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 MBH’s, case, the ratio of 10.44x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving MBH ample headroom to grow its debt facilities.
MBH’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for MBH’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Michelmersh Brick Holdings to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for MBH’s future growth? Take a look at our free research report of analyst consensus for MBH’s outlook.
- Valuation: What is MBH 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 MBH 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.