While small-cap stocks, such as Mondo TV (Suisse) SA (BIT:MSU) with its market cap of €11.00M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. 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 few basic financial health checks you should consider before taking the plunge. However, I know these factors are very high-level, so I recommend you dig deeper yourself into MSU here.
Does MSU generate enough cash through operations?
MSU has built up its total debt levels in the last twelve months, from CHF650.72K to CHF908.18K made up of predominantly near term debt. With this rise in debt, the current cash and short-term investment levels stands at CHF191.15K , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can take a look at some of MSU’s operating efficiency ratios such as ROA here.
Can MSU meet its short-term obligations with the cash in hand?
Looking at MSU’s most recent CHF4.86M liabilities, it seems that the business has not been able to meet these commitments with a current assets level of CHF4.83M, leading to a 0.99x current account ratio. which is under the appropriate industry ratio of 3x.
Can MSU service its debt comfortably?
With total debt exceeding equities, MSU is considered a highly levered company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In MSU’s case, the ratio of 3.71x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving MSU ample headroom to grow its debt facilities.
Next Steps:
MSU’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I’m sure MSU has company-specific issues impacting its capital structure decisions. I recommend you continue to research Mondo TV (Suisse) to get a better picture of the stock by looking at: