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While small-cap stocks, such as MotorCycle Holdings Limited (ASX:MTO) with its market cap of AU$234.49M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Specialty Retail industry facing headwinds from current disruption, even ones that are profitable, tend to be high risk. So, understanding the company’s financial health becomes vital. Here are few basic financial health checks you should consider before taking the plunge. However, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into MTO here.
Does MTO generate an acceptable amount of cash through operations?
MTO has built up its total debt levels in the last twelve months, from AU$30.24M to AU$34.10M , which is made up of current and long term debt. With this rise in debt, MTO’s cash and short-term investments stands at AU$4.52M , ready to deploy into the business. On top of this, MTO has produced AU$8.46M in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 24.81%, indicating that MTO’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In MTO’s case, it is able to generate 0.25x cash from its debt capital.
Can MTO pay its short-term liabilities?
Looking at MTO’s most recent AU$37.72M liabilities, it seems that the business has been able to meet these commitments with a current assets level of AU$52.61M, leading to a 1.39x current account ratio. Generally, for Specialty Retail companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is MTO’s debt level acceptable?
MTO is a relatively highly levered company with a debt-to-equity of 53.85%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether MTO 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 MTO’s, case, the ratio of 14.39x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as MTO’s high interest coverage is seen as responsible and safe practice.
Next Steps:
MTO’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for MTO’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research MotorCycle Holdings to get a better picture of the stock by looking at the areas below. Just a heads up – to access some parts of the Simply Wall St research tool you might be asked to create a free account, but it takes just one click and the information they provide is definitely worth it in my opinion.