Merlin Group SA. (WSE:MRG) is a small-cap stock with a market capitalization of ZŁ496.40K. 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? Companies operating in the Internet industry, in particular ones that run negative earnings, tend to be high risk. Assessing first and foremost the financial health is 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 suggest you dig deeper yourself into MRG here.
Does MRG generate an acceptable amount of cash through operations?
Over the past year, MRG has ramped up its debt from ZŁ2.12M to ZŁ27.57M made up of predominantly near term debt. With this increase in debt, MRG’s cash and short-term investments stands at ZŁ3.50M , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of MRG’s operating efficiency ratios such as ROA here.
Does MRG’s liquid assets cover its short-term commitments?
Looking at MRG’s most recent ZŁ79.98M liabilities, it seems that the business has not been able to meet these commitments with a current assets level of ZŁ14.52M, leading to a 0.18x current account ratio. which is under the appropriate industry ratio of 3x.
Does MRG face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 60.02%, MRG can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since MRG is presently unprofitable, there’s a question of sustainability of its current operations. 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:
At its current level of cash flow coverage, MRG has room for improvement to better cushion for events which may require debt repayment. Furthermore, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven’t considered other factors such as how MRG has been performing in the past. I recommend you continue to research Merlin Group to get a better picture of the stock by looking at: