Investors are always looking for growth in small-cap stocks like MLP Group SA. (WSE:MLG), with a market cap of ZŁ793.36M. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, I know these factors are very high-level, so I suggest you dig deeper yourself into MLG here.

How does MLG’s operating cash flow stack up against its debt?

Over the past year, MLG has ramped up its debt from ZŁ354.56M to ZŁ477.45M , which comprises of short- and long-term debt. With this increase in debt, MLG currently has ZŁ64.83M remaining in cash and short-term investments for investing into the business. Moreover, MLG has produced cash from operations of ZŁ55.03M during the same period of time, resulting in an operating cash to total debt ratio of 11.53%, signalling that MLG’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In MLG’s case, it is able to generate 0.12x cash from its debt capital.

Does MLG’s liquid assets cover its short-term commitments?

At the current liabilities level of ZŁ62.47M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of ZŁ95.26M, with a current ratio of 1.52x. Usually, for Real Estate companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Is MLG’s debt level acceptable?

MLG is a relatively highly levered company with a debt-to-equity of 65.71%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether MLG 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 MLG’s, case, the ratio of 3.4x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving MLG ample headroom to grow its debt facilities.

Next Steps:

At its current level of cash flow coverage, MLG has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure MLG has company-specific issues impacting its capital structure decisions. I suggest you continue to research MLP Group to get a more holistic view of the stock by looking at: