While small-cap stocks, such as Moog Inc. (NYSE:MOG.A) with its market cap of US$3.4b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We’ll look at some basic checks that can form a snapshot the company’s financial strength. However, this is not a comprehensive overview, so I’d encourage you to dig deeper yourself into MOG.A here.
MOG.A’s Debt (And Cash Flows)
MOG.A’s debt levels have fallen from US$962m to US$818m over the last 12 months , which also accounts for long term debt. With this debt payback, MOG.A currently has US$112m remaining in cash and short-term investments to keep the business going. Additionally, MOG.A has produced cash from operations of US$122m over the same time period, resulting in an operating cash to total debt ratio of 15%, indicating that MOG.A’s operating cash is less than its debt.
Can MOG.A pay its short-term liabilities?
With current liabilities at US$677m, it seems that the business has been able to meet these commitments with a current assets level of US$1.5b, leading to a 2.2x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Aerospace & Defense companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does MOG.A face the risk of succumbing to its debt-load?
MOG.A is a relatively highly levered company with a debt-to-equity of 64%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can test if MOG.A’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 MOG.A, the ratio of 7.16x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving MOG.A ample headroom to grow its debt facilities.
Although MOG.A’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how MOG.A has been performing in the past. I suggest you continue to research Moog to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for MOG.A’s future growth? Take a look at our free research report of analyst consensus for MOG.A’s outlook.
- Valuation: What is MOG.A 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 MOG.A 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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