Yahoo Finance Is Morguard Corporation's (TSE:MRC) Balance Sheet A Threat To Its Future?
Morguard Corporation (TSE:MRC) is a small-cap stock with a market capitalization of CA$2.1b. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Evaluating financial health as part of your investment thesis is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, this is not a comprehensive overview, so I suggest you dig deeper yourself into MRC here.
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Does MRC Produce Much Cash Relative To Its Debt?
Over the past year, MRC has ramped up its debt from CA$5.5b to CA$6.0b , which accounts for long term debt. With this growth in debt, the current cash and short-term investment levels stands at CA$139m to keep the business going. Moreover, MRC has produced CA$263m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 4.4%, meaning that MRC’s debt is not covered by operating cash.
Does MRC’s liquid assets cover its short-term commitments?
Looking at MRC’s CA$1.1b in current liabilities, it seems that the business may not be able to easily meet these obligations given the level of current assets of CA$255m, with a current ratio of 0.22x. The current ratio is calculated by dividing current assets by current liabilities.
Can MRC service its debt comfortably?
Since total debt levels exceed equity, MRC is a highly leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can check to see whether MRC 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 MRC's, case, the ratio of 2.15x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
Next Steps:
MRC’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. But, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven't considered other factors such as how MRC has been performing in the past. You should continue to research Morguard to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for MRC’s future growth? Take a look at our free research report of analyst consensus for MRC’s outlook.
Historical Performance: What has MRC's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
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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