Yahoo Finance Are Macmahon Holdings Limited’s (ASX:MAH) Interest Costs Too High?
Macmahon Holdings Limited (ASX:MAH) is a small-cap stock with a market capitalization of AU$460.53m. 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. I believe these basic checks tell most of the story you need to know. Though, I know these factors are very high-level, so I recommend you dig deeper yourself into MAH here.
How does MAH’s operating cash flow stack up against its debt?
MAH’s debt levels surged from AU$204.00k to AU$8.85m over the last 12 months made up of predominantly near term debt. With this rise in debt, MAH’s cash and short-term investments stands at AU$62.93m for investing into the business. On top of this, MAH has generated cash from operations of AU$30.22m during the same period of time, resulting in an operating cash to total debt ratio of 341.49%, meaning that MAH’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 MAH’s case, it is able to generate 3.41x cash from its debt capital.
Can MAH pay its short-term liabilities?
With current liabilities at AU$102.62m, it appears that the company has been able to meet these commitments with a current assets level of AU$164.48m, leading to a 1.6x current account ratio. Generally, for Metals and Mining companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Is MAH’s debt level acceptable?
With debt at 11.31% of equity, MAH may be thought of as appropriately levered. This range is considered safe as MAH is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether MAH 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 MAH’s, case, the ratio of 9.8x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as MAH’s high interest coverage is seen as responsible and safe practice.
Next Steps:
MAH’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure MAH has company-specific issues impacting its capital structure decisions. You should continue to research Macmahon Holdings to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for MAH’s future growth? Take a look at our free research report of analyst consensus for MAH’s outlook.
Valuation: What is MAH 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 MAH 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 pass 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.
