What Does MaxiTRANS Industries Limited's (ASX:MXI) Balance Sheet Tell Us About It?

Simply Wall St

Mon, May 27, 2019, 10:15 PM

MaxiTRANS Industries Limited (ASX:MXI) is a small-cap stock with a market capitalization of AU$53m. 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. 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 recommend you dig deeper yourself into MXI here.

Does MXI Produce Much Cash Relative To Its Debt?

MXI's debt levels surged from AU$51m to AU$61m over the last 12 months , which accounts for long term debt. With this rise in debt, MXI's cash and short-term investments stands at AU$9.3m to keep the business going. On top of this, MXI has produced AU$13m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 22%, signalling that MXI’s debt is appropriately covered by operating cash.

Can MXI pay its short-term liabilities?

Looking at MXI’s AU$125m in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.01x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Machinery companies, this is a reasonable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Is MXI’s debt level acceptable?

With a debt-to-equity ratio of 46%, MXI can be considered as an above-average leveraged company. 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 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 3.4x 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.

Next Steps:

Although MXI’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. I admit this is a fairly basic analysis for MXI's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research MaxiTRANS Industries to get a more holistic view of the small-cap by looking at: