While small-cap stocks, such as Mineral Commodities Limited (ASX:MRC) with its market cap of AUD A$50.62M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Why is it important? A major downturn in the energy industry has resulted in over 150 companies going bankrupt and has put more than 100 on the verge of a collapse, primarily due to excessive debt. These factors make a basic understanding of a company’s financial position of utmost importance for a potential investor. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Check out our latest analysis for Mineral Commodities
How does MRC’s operating cash flow stack up against its debt?
There are many headwinds that come unannounced, such as natural disasters and political turmoil, which can challenge a small business and its ability to adapt and recover. These adverse events bring devastation and yet does not absolve the company from its debt. We can test the impact of these adverse events by looking at whether cash from its current operations can pay back its current debt obligations. In the case of MRC, operating cash flow over the past twelve months do cover its current debt, which means MRC generates enough money in a year through its operations to pay off its near-term debt. Hence, debt poses a virtually insignificant risk for the company. This is great news for both debtholders and shareholders, as the company exhibits cautious cash and debt management.
Does MRC’s liquid assets cover its short-term commitments?
What about its commitments to other stakeholders such as payments to suppliers and employees? As cash flow from operation is hindered by adverse events, MRC may need to liquidate its short-term assets to meet these upcoming payments. We should examine if the company’s cash and short-term investment levels match its current liabilities. Our analysis shows that MRC does have enough liquid assets on hand to meet its upcoming liabilities, which lowers our concerns should adverse events arise.
Is MRC’s level of debt at an acceptable level?
Debt-to-equity ratio tells us how much of the asset debtors could claim if the company went out of business. For MRC, the debt-to-equity ratio is 13.50%, which indicates that its debt is at an acceptable level.
Next Steps:
Are you a shareholder? MRC’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. Moving forward, its financial position may be different. I suggest keeping abreast of market expectations for MRC’s future growth on our free analysis platform.