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Mareterram Limited (ASX:MTM) is a small-cap stock with a market capitalization of AU$31m. 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 crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into MTM here.
Does MTM produce enough cash relative to debt?
MTM has built up its total debt levels in the last twelve months, from AU$13m to AU$17m – this includes both the current and long-term debt. With this rise in debt, MTM currently has AU$67k remaining in cash and short-term investments , ready to deploy into the business. Additionally, MTM has produced cash from operations of AU$12m over the same time period, leading to an operating cash to total debt ratio of 73%, indicating that MTM’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In MTM’s case, it is able to generate 0.73x cash from its debt capital.
Can MTM meet its short-term obligations with the cash in hand?
With current liabilities at AU$10m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.2x. Usually, for Food companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can MTM service its debt comfortably?
MTM is a relatively highly levered company with a debt-to-equity of 60%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if MTM’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 MTM, the ratio of 2.23x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
Next Steps:
Although MTM’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 MTM has been performing in the past. You should continue to research Mareterram to get a better picture of the small-cap by looking at: