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While small-cap stocks, such as Muehlhan AG (ETR:M4N) with its market cap of €56m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is 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, this is not a comprehensive overview, so I suggest you dig deeper yourself into M4N here.
Does M4N Produce Much Cash Relative To Its Debt?
Over the past year, M4N has maintained its debt levels at around €33m including long-term debt. At this stable level of debt, M4N currently has €11m remaining in cash and short-term investments , ready to be used for running the business. On top of this, M4N has produced €11m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 34%, indicating that M4N’s operating cash is sufficient to cover its debt.
Does M4N’s liquid assets cover its short-term commitments?
At the current liabilities level of €66m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.28x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Construction companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Can M4N service its debt comfortably?
With debt reaching 49% of equity, M4N 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 M4N 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 M4N's, case, the ratio of 6.53x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as M4N’s high interest coverage is seen as responsible and safe practice.
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M4N’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. 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 M4N has been performing in the past. I suggest you continue to research Muehlhan to get a better picture of the small-cap by looking at: