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While small-cap stocks, such as MTQ Corporation Limited (SGX:M05) with its market cap of S$31.68M, 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 Energy Services industry, in particular ones that run negative earnings, tend to be high risk. So, understanding the company’s financial health becomes vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into M05 here.
Does M05 generate enough cash through operations?
M05’s debt levels have fallen from S$44.09M to S$41.74M over the last 12 months , which is made up of current and long term debt. With this debt payback, M05’s cash and short-term investments stands at S$31.41M for investing into the business. Moreover, M05 has generated cash from operations of S$190.00K during the same period of time, leading to an operating cash to total debt ratio of 0.46%, meaning that M05’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for unprofitable businesses as traditional metrics such as return on asset (ROA) requires a positive net income. In M05’s case, it is able to generate 0.0046x cash from its debt capital.
Can M05 pay its short-term liabilities?
Looking at M05’s most recent S$30.50M liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.14x. Though, anything about 3x may be excessive, since M05 may be leaving too much capital in low-earning investments.
Can M05 service its debt comfortably?
With a debt-to-equity ratio of 27.10%, M05’s debt level may be seen as prudent. M05 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. M05’s risk around capital structure is low, and the company has the headroom and ability to raise debt should it need to in the future.
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M05’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure M05 has company-specific issues impacting its capital structure decisions. I recommend you continue to research MTQ to get a more holistic view of the stock by looking at: