Monro, Inc. (NASDAQ:MNRO) is a small-cap stock with a market capitalization of US$2.7b. 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, 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 just a partial view of the stock, and I recommend you dig deeper yourself into MNRO here.
MNRO’s Debt (And Cash Flows)
MNRO has shrunk its total debt levels in the last twelve months, from US$399m to US$370m , which includes long-term debt. With this debt repayment, the current cash and short-term investment levels stands at US$3.6m to keep the business going. On top of this, MNRO has produced US$153m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 41%, indicating that MNRO’s operating cash is sufficient to cover its debt.
Can MNRO pay its short-term liabilities?
Looking at MNRO’s US$213m 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 1.05x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Specialty Retail companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Can MNRO service its debt comfortably?
With debt reaching 54% of equity, MNRO may be thought of as relatively highly levered. 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 check to see whether MNRO 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 MNRO’s, case, the ratio of 5.1x 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 MNRO’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 MNRO’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 MNRO has company-specific issues impacting its capital structure decisions. You should continue to research Monro to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for MNRO’s future growth? Take a look at our free research report of analyst consensus for MNRO’s outlook.
- Valuation: What is MNRO 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 MNRO 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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