Yahoo Finance Are Metro Inc.'s (TSE:MRU) Interest Costs Too High?
Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Metro Inc. (TSE:MRU), with a market cap of CA$13b, often get neglected by retail investors. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. Let’s take a look at MRU’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into MRU here.
Check out our latest analysis for Metro
MRU’s Debt (And Cash Flows)
MRU's debt levels have fallen from CA$2.8b to CA$2.6b over the last 12 months , which also accounts for long term debt. With this debt payback, MRU currently has CA$133m remaining in cash and short-term investments to keep the business going. On top of this, MRU has produced CA$638m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 24%, indicating that MRU’s operating cash is sufficient to cover its debt.
Can MRU meet its short-term obligations with the cash in hand?
At the current liabilities level of CA$1.3b, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.43x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Consumer Retailing companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Does MRU face the risk of succumbing to its debt-load?
With debt reaching 46% of equity, MRU may be thought of as relatively highly levered. This is not uncommon for a mid-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 MRU's case, the ratio of 9.95x suggests that interest is appropriately 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.
Next Steps:
MRU’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. Since there is also no concerns around MRU's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for MRU's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Metro to get a more holistic view of the mid-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for MRU’s future growth? Take a look at our free research report of analyst consensus for MRU’s outlook.
Valuation: What is MRU 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 MRU 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.
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