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Mountview Estates PLC (LON:MTVW) is a small-cap stock with a market capitalization of UK£392m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Assessing first and foremost the financial health is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. However, since I only look at basic financial figures, I suggest you dig deeper yourself into MTVW here.
Does MTVW produce enough cash relative to debt?
MTVW has built up its total debt levels in the last twelve months, from UK£32m to UK£50m – this includes long-term debt. With this increase in debt, MTVW’s cash and short-term investments stands at UK£5.4m for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can take a look at some of MTVW’s operating efficiency ratios such as ROA here.
Does MTVW’s liquid assets cover its short-term commitments?
With current liabilities at UK£4.6m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 82.71x. Having said that, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.
Does MTVW face the risk of succumbing to its debt-load?
MTVW’s level of debt is appropriate relative to its total equity, at 14%. MTVW is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether MTVW 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 MTVW’s, case, the ratio of 53.01x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
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MTVW has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how MTVW has been performing in the past. I recommend you continue to research Mountview Estates to get a more holistic view of the stock by looking at: