Stocks with market capitalization between $2B and $10B, such as Mercury NZ Limited (NZSE:MCY) with a size of NZ$4.66B, do not attract as much attention from the investing community as do the small-caps and large-caps. However, history shows that overlooked mid-cap companies have performed better on a risk-adjusted manner than the smaller and larger segment of the market. Let’s take a look at MCY’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into MCY here. Check out our latest analysis for Mercury NZ
How does MCY’s operating cash flow stack up against its debt?
MCY’s debt levels have fallen from NZ$1,370.0M to NZ$1,232.0M over the last 12 months – this includes both the current and long-term debt. With this debt repayment, MCY currently has NZ$38.0M remaining in cash and short-term investments for investing into the business. On top of this, MCY has generated cash from operations of NZ$372.0M during the same period of time, resulting in an operating cash to total debt ratio of 30.19%, meaning that MCY’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In MCY’s case, it is able to generate 0.3x cash from its debt capital.
Can MCY meet its short-term obligations with the cash in hand?
At the current liabilities level of NZ$358.0M liabilities, the company is not able to meet these obligations given the level of current assets of NZ$327.0M, with a current ratio of 0.91x below the prudent level of 3x.
Is MCY’s debt level acceptable?MCY’s level of debt is appropriate relative to its total equity, at 37.24%. This range is considered safe as MCY is not taking on too much debt obligation, which may be constraining for future growth. We can test if MCY’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For MCY, the ratio of 3.52x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving MCY ample headroom to grow its debt facilities.
MCY’s debt level is appropriate for a company its size. Furthermore, it is able to generate sufficient cash flow coverage, meaning it is able to put its debt in good use. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the mid-cap. This is only a rough assessment of financial health, and I’m sure MCY has company-specific issues impacting its capital structure decisions. I suggest you continue to research Mercury NZ to get a better picture of the stock by looking at:
1. Future Outlook: What are well-informed industry analysts predicting for MCY’s future growth? Take a look at our free research report of analyst consensus for MCY’s outlook.
2. Valuation: What is MCY 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 MCY 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.