Macquarie Media Limited (ASX:MRN) is a small-cap stock with a market capitalization of AU$227.43M. 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? 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. Here are few basic financial health checks you should consider before taking the plunge. Though, this commentary is still very high-level, so I suggest you dig deeper yourself into MRN here.
How does MRN’s operating cash flow stack up against its debt?
Over the past year, MRN has maintained its debt levels at around AU$40.79M – this includes both the current and long-term debt. At this stable level of debt, MRN currently has AU$18.13M remaining in cash and short-term investments , ready to deploy into the business. On top of this, MRN has produced cash from operations of AU$11.87M in the last twelve months, resulting in an operating cash to total debt ratio of 29.11%, indicating that MRN’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In MRN’s case, it is able to generate 0.29x cash from its debt capital.
Can MRN meet its short-term obligations with the cash in hand?
Looking at MRN’s most recent AU$22.78M liabilities, the company has been able to meet these commitments with a current assets level of AU$51.69M, leading to a 2.27x current account ratio. Usually, for Media companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is MRN’s debt level acceptable?
With a debt-to-equity ratio of 19.88%, MRN’s debt level may be seen as prudent. This range is considered safe as MRN is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether MRN 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 MRN’s, case, the ratio of 18.88x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as MRN’s high interest coverage is seen as responsible and safe practice.