Yahoo Finance How Financially Strong Is Martinrea International Inc (TSE:MRE)?
Investors are always looking for growth in small-cap stocks like Martinrea International Inc (TSE:MRE), with a market cap of CA$963m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, this commentary is still very high-level, so I recommend you dig deeper yourself into MRE here.
Does MRE produce enough cash relative to debt?
MRE’s debt level has been constant at around CA$680m over the previous year made up of current and long term debt. At this constant level of debt, MRE currently has CA$75m remaining in cash and short-term investments , ready to deploy into the business. On top of this, MRE has generated CA$275m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 41%, signalling that MRE’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In MRE’s case, it is able to generate 0.41x cash from its debt capital.
Does MRE’s liquid assets cover its short-term commitments?
Looking at MRE’s most recent CA$845m liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.35x. Generally, for Auto Components companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can MRE service its debt comfortably?
MRE is a relatively highly levered company with a debt-to-equity of 62%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether MRE 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 MRE’s, case, the ratio of 11.13x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving MRE ample headroom to grow its debt facilities.
Next Steps:
Although MRE’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. 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 MRE has been performing in the past. I suggest you continue to research Martinrea International to get a more holistic view of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for MRE’s future growth? Take a look at our free research report of analyst consensus for MRE’s outlook.
Valuation: What is MRE worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether MRE is currently mispriced by the market.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
