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Investors are always looking for growth in small-cap stocks like MCS Services Limited (ASX:MSG), with a market cap of AU$3m. However, an important fact which most ignore is: how financially healthy is the business? Since MSG is loss-making right now, it’s crucial to understand the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. However, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into MSG here.
How much cash does MSG generate through its operations?
Over the past year, MSG has maintained its debt levels at around AU$284k , which is mainly comprised of near term debt. At this current level of debt, MSG currently has AU$835k remaining in cash and short-term investments for investing into the business. Additionally, MSG has produced cash from operations of AU$176k in the last twelve months, resulting in an operating cash to total debt ratio of 62%, signalling that MSG’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency for unprofitable businesses as traditional metrics such as return on asset (ROA) requires a positive net income. In MSG’s case, it is able to generate 0.62x cash from its debt capital.
Can MSG pay its short-term liabilities?
With current liabilities at AU$3m, the company has been able to meet these commitments with a current assets level of AU$4m, leading to a 1.3x current account ratio. Usually, for Commercial Services companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is MSG’s debt level acceptable?
With debt at 29% of equity, MSG may be thought of as appropriately levered. MSG is not taking on too much debt commitment, which may be constraining for future growth. Investors’ risk associated with debt is very low with MSG, and the company has plenty of headroom and ability to raise debt should it need to in the future.
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MSG has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for MSG’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research MCS Services to get a more holistic view of the stock by looking at: