While small-cap stocks, such as MMP Industries Limited (NSEI:MMP) with its market cap of ₹4.06B, 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. Here are few basic financial health checks you should consider before taking the plunge. Though, this commentary is still very high-level, so I recommend you dig deeper yourself into MMP here.
How does MMP’s operating cash flow stack up against its debt?
Over the past year, MMP has maintained its debt levels at around ₹407.53M made up of current and long term debt. At this constant level of debt, the current cash and short-term investment levels stands at ₹17.16M , ready to deploy into the business. Additionally, MMP has produced cash from operations of ₹108.73M over the same time period, leading to an operating cash to total debt ratio of 26.68%, meaning that MMP’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 MMP’s case, it is able to generate 0.27x cash from its debt capital.
Can MMP pay its short-term liabilities?
With current liabilities at ₹495.89M, it appears that the company has been able to meet these commitments with a current assets level of ₹594.78M, leading to a 1.2x current account ratio. Generally, for Metals and Mining companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does MMP face the risk of succumbing to its debt-load?With debt reaching 79.92% of equity, MMP may be thought of as relatively highly levered. 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 MMP's case, the ratio of 4.64x suggests that interest is appropriately 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.
Although MMP’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. Since there is also no concerns around MMP's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure MMP has company-specific issues impacting its capital structure decisions. You should continue to research MMP Industries to get a more holistic view of the small-cap by looking at:
- Historical Performance: What has MMP'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.
- 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.