Canada Markets closed

Are Metro Inc.'s (TSE:MRU) Interest Costs Too High?

Simply Wall St

Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!

Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as Metro Inc. (TSE:MRU) a safer option. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. But, its financial health remains the key to continued success. I will provide an overview of Metro’s financial liquidity and leverage to give you an idea of Metro’s position to take advantage of potential acquisitions or comfortably endure future downturns. 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

Does MRU Produce Much Cash Relative To Its Debt?

MRU has shrunk its total debt levels in the last twelve months, from CA$2.8b to CA$2.6b – this includes long-term debt. With this debt payback, MRU currently has CA$133m remaining in cash and short-term investments to keep the business going. Additionally, 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%, signalling that MRU’s debt is appropriately covered by operating cash.

Does MRU’s liquid assets cover its short-term commitments?

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 the number you get when you divide current assets by current liabilities. Generally, for Consumer Retailing companies, this is a reasonable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

TSX:MRU Historical Debt, June 21st 2019

Can MRU service its debt comfortably?

MRU is a relatively highly levered company with a debt-to-equity of 46%. This isn’t uncommon for large companies because interest payments on debt are tax deductible, meaning debt can be a cheaper source of capital than equity. Accordingly, large companies often have an advantage over small-caps through lower cost of capital due to cheaper financing. By measuring how many times MRU’s earnings can cover interest payments, we can evaluate whether its level of debt is sustainable or not. As a rule of thumb, a company should have earnings before interest and tax (EBIT) of at least three times the size of net interest. For MRU, the ratio of 9.95x suggests that interest is appropriately covered. Large-cap investments like MRU are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.

Next Steps:

At its current level of cash flow coverage, MRU has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I'm sure MRU has company-specific issues impacting its capital structure decisions. I recommend you continue to research Metro to get a better picture of the stock by looking at:

  1. 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.
  2. 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.
  3. 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.