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Metro Mining Limited (ASX:MMI) is a small-cap stock with a market capitalization of AU$354.20M. 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? Oil and Gas companies, in particular ones that run negative earnings, are more likely to be higher risk. Assessing first and foremost the financial health is vital. I believe these basic checks tell most of the story you need to know. Though, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into MMI here.
Does MMI generate enough cash through operations?
Over the past year, MMI has borrowed debt capital of around AU$15.59M – this includes both the current and long-term debt. With this ramp up in debt, MMI’s cash and short-term investments stands at AU$15.35M for investing 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. For this article’s sake, I won’t be looking at this today, but you can examine some of MMI’s operating efficiency ratios such as ROA here.
Does MMI’s liquid assets cover its short-term commitments?
With current liabilities at AU$20.14M, it seems that the business has not been able to meet these commitments with a current assets level of AU$16.29M, leading to a 0.81x current account ratio. which is under the appropriate industry ratio of 3x.
Is MMI’s debt level acceptable?
MMI’s level of debt is appropriate relative to its total equity, at 27.91%. This range is considered safe as MMI is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. MMI’s risk around capital structure is low, and the company has the headroom and ability to raise debt should it need to in the future.
Next Steps:
MMI’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. In addition to this, 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 MMI has been performing in the past. I recommend you continue to research Metro Mining to get a better picture of the stock by looking at: