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What does Mitchell Services Limited’s (ASX:MSV) Balance Sheet Tell Us About Its Future?

Mitchell Services Limited (ASX:MSV) is a small-cap stock with a market capitalization of AU$82m. 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? Given that MSV is not presently profitable, it’s essential to understand the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into MSV here.

How does MSV’s operating cash flow stack up against its debt?

MSV’s debt levels surged from AU$16m to AU$20m over the last 12 months , which is made up of current and long term debt. With this growth in debt, MSV currently has AU$2m remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can examine some of MSV’s operating efficiency ratios such as ROA here.

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

With current liabilities at AU$23m, the company has been able to meet these commitments with a current assets level of AU$28m, leading to a 1.19x current account ratio. Usually, for Metals and Mining companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.

ASX:MSV Historical Debt October 23rd 18

Does MSV face the risk of succumbing to its debt-load?

With debt reaching 95% of equity, MSV may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since MSV is currently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.

Next Steps:

MSV’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how MSV has been performing in the past. I suggest you continue to research Mitchell Services to get a more holistic view of the stock by looking at:

  1. Historical Performance: What has MSV’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.
  2. 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.