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While small-cap stocks, such as Mercer Group Limited (NZSE:MGL) with its market cap of NZ$12m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since MGL is loss-making right now, it’s crucial to evaluate the current state of its operations and pathway to profitability. We'll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, these checks don't give you a full picture, so I recommend you dig deeper yourself into MGL here.

MGL’s Debt (And Cash Flows)

MGL's debt levels have fallen from NZ$8.5m to NZ$4.5m over the last 12 months , which also accounts for long term debt. With this reduction in debt, MGL's cash and short-term investments stands at NZ$3.5m , ready to be used for running the business. On top of this, MGL has produced NZ$7.1m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 158%, indicating that MGL’s current level of operating cash is high enough to cover debt.

Can MGL pay its short-term liabilities?

At the current liabilities level of NZ$15m, it seems that the business may not have an easy time meeting these commitments with a current assets level of NZ$12m, leading to a current ratio of 0.8x. The current ratio is the number you get when you divide current assets by current liabilities.

Is MGL’s debt level acceptable?

MGL is a relatively highly levered company with a debt-to-equity of 96%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. But since MGL is presently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.

Next Steps:

Although MGL’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. However, its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for MGL's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Mercer Group to get a more holistic view of the stock by looking at: