Yahoo Finance What does MYOB Group Limited’s (ASX:MYO) Balance Sheet Tell Us About Its Future?
While small-cap stocks, such as MYOB Group Limited (ASX:MYO) with its market cap of AU$1.81b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Software companies, even ones that are profitable, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is vital. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into MYO here.
Does MYO produce enough cash relative to debt?
Over the past year, MYO has maintained its debt levels at around AU$432.99m – this includes both the current and long-term debt. At this current level of debt, MYO currently has AU$54.78m remaining in cash and short-term investments , ready to deploy into the business. Additionally, MYO has generated cash from operations of AU$163.92m over the same time period, resulting in an operating cash to total debt ratio of 37.86%, signalling that MYO’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In MYO’s case, it is able to generate 0.38x cash from its debt capital.
Does MYO’s liquid assets cover its short-term commitments?
Looking at MYO’s most recent AU$100.75m liabilities, it appears that the company has not been able to meet these commitments with a current assets level of AU$100.36m, leading to a 1x current account ratio. which is under the appropriate industry ratio of 3x.
Is MYO’s debt level acceptable?
MYO is a relatively highly levered company with a debt-to-equity of 51.28%. This is not uncommon for a small-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 MYO’s case, the ratio of 8.28x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as MYO’s high interest coverage is seen as responsible and safe practice.
Next Steps:
MYO’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. Though 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 MYO has been performing in the past. You should continue to research MYOB Group to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for MYO’s future growth? Take a look at our free research report of analyst consensus for MYO’s outlook.
Valuation: What is MYO 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 MYO 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.
