Investors are always looking for growth in small-cap stocks like Mangata Holding S.A. (WSE:MGT), with a market cap of zł435m. However, an important fact which most ignore is: how financially healthy is the business? Understanding the company’s financial health becomes crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company’s balance sheet strength. Nevertheless, this is just a partial view of the stock, and I suggest you dig deeper yourself into MGT here.
MGT’s Debt (And Cash Flows)
Over the past year, MGT has ramped up its debt from zł140m to zł169m , which includes long-term debt. With this rise in debt, MGT’s cash and short-term investments stands at zł15m , ready to be used for running the business. Additionally, MGT has produced zł66m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 39%, meaning that MGT’s debt is appropriately covered by operating cash.
Can MGT meet its short-term obligations with the cash in hand?
Looking at MGT’s zł189m in current liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.51x. The current ratio is calculated by dividing current assets by current liabilities. For Machinery 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.
Is MGT’s debt level acceptable?
With debt reaching 43% of equity, MGT may be thought of as relatively highly levered. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether MGT 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 MGT’s, case, the ratio of 34.39x 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.
Although MGT’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 MGT’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for MGT’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Mangata Holding to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for MGT’s future growth? Take a look at our free research report of analyst consensus for MGT’s outlook.
- Valuation: What is MGT 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 MGT 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.
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