Investors are always looking for growth in small-cap stocks like Mobilarm Limited (ASX:MBO), with a market cap of AU$6.90M. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Electronic industry, especially ones that are currently loss-making, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is vital. I believe these basic checks tell most of the story you need to know. Nevertheless, I know these factors are very high-level, so I suggest you dig deeper yourself into MBO here.
How does MBO’s operating cash flow stack up against its debt?
MBO’s debt levels surged from AU$3.14M to AU$3.60M over the last 12 months , which is made up of current and long term debt. With this increase in debt, the current cash and short-term investment levels stands at AU$742.74K for investing into the business. Additionally, MBO has produced AU$173.73K in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 4.83%, meaning that MBO’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency for loss making businesses since metrics such as return on asset (ROA) requires a positive net income. In MBO’s case, it is able to generate 0.048x cash from its debt capital.
Can MBO pay its short-term liabilities?
At the current liabilities level of AU$5.23M liabilities, it appears that the company is not able to meet these obligations given the level of current assets of AU$4.82M, with a current ratio of 0.92x below the prudent level of 3x.
Is MBO’s debt level acceptable?
With total debt exceeding equities, MBO is considered a highly levered company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since MBO is currently 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:
MBO’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I’m sure MBO has company-specific issues impacting its capital structure decisions. You should continue to research Mobilarm to get a better picture of the stock by looking at: