John Menzies plc (LSE:MNZS) is a small-cap stock with a market capitalization of UK£540.81M. 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? Evaluating financial health as part of your investment thesis is essential, 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. Nevertheless, this commentary is still very high-level, so I recommend you dig deeper yourself into MNZS here.
Does MNZS generate enough cash through operations?
MNZS has shrunken its total debt levels in the last twelve months, from UK£156.00M to UK£104.10M , which comprises of short- and long-term debt. With this debt repayment, the current cash and short-term investment levels stands at UK£38.90M , ready to deploy into the business. On top of this, MNZS has produced cash from operations of UK£23.70M in the last twelve months, leading to an operating cash to total debt ratio of 22.77%, indicating that MNZS’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In MNZS’s case, it is able to generate 0.23x cash from its debt capital.
Can MNZS meet its short-term obligations with the cash in hand?
Looking at MNZS’s most recent UK£310.50M liabilities, the company is not able to meet these obligations given the level of current assets of UK£298.90M, with a current ratio of 0.96x below the prudent level of 3x.
Does MNZS face the risk of succumbing to its debt-load?
With total debt exceeding equities, MNZS is considered a highly levered company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. 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 MNZS’s case, the ratio of 7.21x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving MNZS ample headroom to grow its debt facilities.Next Steps:
MNZS’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. 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 MNZS has been performing in the past. I recommend you continue to research John Menzies to get a more holistic view of the stock by looking at:
- 1. Future Outlook: What are well-informed industry analysts predicting for MNZS’s future growth? Take a look at our free research report of analyst consensus for MNZS’s outlook.
- 2. Valuation: What is MNZS 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 MNZS 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.