Is MGP Ingredients, Inc.’s (NASDAQ:MGPI) Balance Sheet Strong Enough To Weather A Storm?

MGP Ingredients, Inc. (NASDAQ:MGPI) is a small-cap stock with a market capitalization of US$1.3b. 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? 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. Let’s work through some financial health checks you may wish to consider if you’re interested in this stock. Nevertheless, these checks don’t give you a full picture, so I’d encourage you to dig deeper yourself into MGPI here.

Does MGPI Produce Much Cash Relative To Its Debt?

Over the past year, MGPI has ramped up its debt from US$25m to US$32m , which includes long-term debt. With this growth in debt, MGPI’s cash and short-term investments stands at US$5.0m , ready to be used for running the business. Additionally, MGPI has produced US$33m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 105%, meaning that MGPI’s operating cash is sufficient to cover its debt.

Can MGPI pay its short-term liabilities?

With current liabilities at US$37m, it appears that the company has been able to meet these obligations given the level of current assets of US$155m, with a current ratio of 4.13x. The current ratio is the number you get when you divide current assets by current liabilities. Having said that, a ratio above 3x may be considered excessive by some investors, yet this is not usually a major negative for a company.

NasdaqGS:MGPI Historical Debt, March 27th 2019
NasdaqGS:MGPI Historical Debt, March 27th 2019

Is MGPI’s debt level acceptable?

With debt at 16% of equity, MGPI may be thought of as appropriately levered. This range is considered safe as MGPI is not taking on too much debt obligation, which may be constraining for future growth. We can test if MGPI’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 MGPI, the ratio of 42.93x suggests that interest is comfortably covered, which means that lenders may be willing to lend out more funding as MGPI’s high interest coverage is seen as responsible and safe practice.

Next Steps:

MGPI has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure MGPI has company-specific issues impacting its capital structure decisions. I recommend you continue to research MGP Ingredients to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for MGPI’s future growth? Take a look at our free research report of analyst consensus for MGPI’s outlook.
  2. Valuation: What is MGPI 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 MGPI 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.