MaxiTRANS Industries Limited (ASX:MXI) is a small-cap stock with a market capitalization of AU$95m. 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? So, understanding the company’s financial health becomes essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I suggest you dig deeper yourself into MXI here.

How does MXI’s operating cash flow stack up against its debt?

MXI’s debt levels surged from AU$48m to AU$51m over the last 12 months – this includes both the current and long-term debt. With this rise in debt, the current cash and short-term investment levels stands at AU$10m , ready to deploy into the business. Moreover, MXI has produced AU$20m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 39%, meaning that MXI’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In MXI’s case, it is able to generate 0.39x cash from its debt capital.

Can MXI meet its short-term obligations with the cash in hand?

At the current liabilities level of AU$75m liabilities, it seems that the business has been able to meet these commitments with a current assets level of AU$130m, leading to a 1.74x current account ratio. 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.

Can MXI service its debt comfortably?

With a debt-to-equity ratio of 37%, MXI’s debt level may be seen as prudent. MXI is not taking on too much debt commitment, which may be constraining for future growth. We can test if MXI’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 MXI, the ratio of 6.55x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as MXI’s high interest coverage is seen as responsible and safe practice.

Next Steps:

MXI’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for MXI’s financial health. Other important fundamentals need to be considered alongside. You should continue to research MaxiTRANS Industries to get a better picture of the stock by looking at: