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While small-cap stocks, such as MG International (EPA:ALMGI) with its market cap of €15m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is crucial, 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. However, these checks don't give you a full picture, so I’d encourage you to dig deeper yourself into ALMGI here.
ALMGI’s Debt (And Cash Flows)
ALMGI's debt levels surged from €7.8m to €8.4m over the last 12 months – this includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at €2.6m to keep the business going. On top of this, ALMGI has produced cash from operations of €1.3m during the same period of time, resulting in an operating cash to total debt ratio of 16%, meaning that ALMGI’s debt is not covered by operating cash.
Does ALMGI’s liquid assets cover its short-term commitments?
At the current liabilities level of €11m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.8x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Consumer Durables companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does ALMGI face the risk of succumbing to its debt-load?
ALMGI is a relatively highly levered company with a debt-to-equity of 73%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can check to see whether ALMGI 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 ALMGI's, case, the ratio of 28.85x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving ALMGI ample headroom to grow its debt facilities.
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ALMGI’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for ALMGI's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research MG International to get a more holistic view of the small-cap by looking at: