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Macfarlane Group PLC (LON:MACF) is a small-cap stock with a market capitalization of UK£143m. 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? So, understanding the company’s financial health becomes vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, since I only look at basic financial figures, I recommend you dig deeper yourself into MACF here.
How does MACF’s operating cash flow stack up against its debt?
MACF’s debt levels have fallen from UK£16m to UK£14m over the last 12 months . With this debt repayment, MACF’s cash and short-term investments stands at UK£2.6m , ready to deploy into the business. Additionally, MACF has produced cash from operations of UK£8.8m in the last twelve months, leading to an operating cash to total debt ratio of 64%, signalling that MACF’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In MACF’s case, it is able to generate 0.64x cash from its debt capital.
Does MACF’s liquid assets cover its short-term commitments?
Looking at MACF’s UK£63m in current liabilities, it appears that the company has been able to meet these commitments with a current assets level of UK£67m, leading to a 1.06x current account ratio. Usually, for Trade Distributors companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is MACF’s debt level acceptable?
With a debt-to-equity ratio of 23%, MACF’s debt level may be seen as prudent. This range is considered safe as MACF is not taking on too much debt obligation, which may be constraining for future growth. We can test if MACF’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 MACF, the ratio of 21.46x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving MACF ample headroom to grow its debt facilities.
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MACF’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for MACF’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Macfarlane Group to get a more holistic view of the stock by looking at: