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Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as Mimecast Limited (NASDAQ:MIME) with a market-capitalization of US$3.2b, rarely draw their attention. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. Let’s take a look at MIME’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Don’t forget that this is a general and concentrated examination of Mimecast’s financial health, so you should conduct further analysis into MIME here.
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Does MIME Produce Much Cash Relative To Its Debt?
MIME's debt levels surged from US$41m to US$188m over the last 12 months , which accounts for long term debt. With this growth in debt, MIME's cash and short-term investments stands at US$157m , ready to be used for running the business. On top of this, MIME has generated US$63m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 33%, indicating that MIME’s current level of operating cash is high enough to cover debt.
Can MIME pay its short-term liabilities?
At the current liabilities level of US$189m, it seems that the business has been able to meet these obligations given the level of current assets of US$242m, with a current ratio of 1.29x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Software companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Does MIME face the risk of succumbing to its debt-load?
MIME is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since MIME is presently loss-making, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
Although MIME’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I'm sure MIME has company-specific issues impacting its capital structure decisions. You should continue to research Mimecast to get a better picture of the mid-cap by looking at: