Mustera Property Group Limited (ASX:MPX) is a small-cap stock with a market capitalization of AU$26.24M. 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? Assessing first and foremost the financial health is vital, 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, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into MPX here.

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

MPX has shrunken its total debt levels in the last twelve months, from AU$17.03M to AU$14.74M – this includes both the current and long-term debt. With this debt repayment, MPX currently has AU$3.52M remaining in cash and short-term investments , ready to deploy into the business. Additionally, MPX has generated cash from operations of AU$2.55M over the same time period, resulting in an operating cash to total debt ratio of 17.27%, indicating that MPX’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In MPX’s case, it is able to generate 0.17x cash from its debt capital.

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

With current liabilities at AU$12.70M, it appears that the company has been able to meet these commitments with a current assets level of AU$16.10M, leading to a 1.27x current account ratio. Generally, for Real Estate companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.

Does MPX face the risk of succumbing to its debt-load?

Since total debt levels have outpaced equities, MPX is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In MPX’s case, the ratio of 2.41x 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.