Investors are always looking for growth in small-cap stocks like MYOB Group Limited (ASX:MYO), with a market cap of AU$2.01B. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Software industry, even ones that are profitable, are more likely to be higher risk. Assessing first and foremost the financial health is essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into MYO here.
How does MYO’s operating cash flow stack up against its debt?
MYO’s debt level has been constant at around AU$435.22M over the previous year made up of current and long term debt. At this stable level of debt, the current cash and short-term investment levels stands at AU$61.43M for investing into the business. Moreover, MYO has generated AU$145.83M in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 33.51%, indicating that MYO’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In MYO’s case, it is able to generate 0.34x cash from its debt capital.
Can MYO meet its short-term obligations with the cash in hand?
With current liabilities at AU$91.47M, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.05x. Generally, for Software companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Does MYO face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 51.23%, MYO can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. 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 MYO’s case, the ratio of 7.39x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving MYO ample headroom to grow its debt facilities.
Next Steps:
MYO’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how MYO has been performing in the past. You should continue to research MYOB Group to get a more holistic view of the small-cap by looking at: