Mercor SA (WSE:MCR): Time For A Financial Health Check

Simply Wall St

Sat, Jun 15, 2019, 1:59 AM

Investors are always looking for growth in small-cap stocks like Mercor SA (WSE:MCR), with a market cap of zł125m. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, this is not a comprehensive overview, so I suggest you dig deeper yourself into MCR here.

Does MCR Produce Much Cash Relative To Its Debt?

MCR has sustained its debt level by about zł109m over the last 12 months – this includes long-term debt. At this constant level of debt, the current cash and short-term investment levels stands at zł14m to keep the business going. Additionally, MCR has produced cash from operations of zł18m in the last twelve months, leading to an operating cash to total debt ratio of 16%, meaning that MCR’s current level of operating cash is not high enough to cover debt.

Can MCR pay its short-term liabilities?

At the current liabilities level of zł99m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.68x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Building companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.

Is MCR’s debt level acceptable?

With a debt-to-equity ratio of 74%, MCR can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if MCR’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 MCR, the ratio of 11.57x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving MCR ample headroom to grow its debt facilities.

Next Steps:

Although MCR’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around MCR's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure MCR has company-specific issues impacting its capital structure decisions. You should continue to research Mercor to get a more holistic view of the small-cap by looking at: