Yahoo Finance Macmahon Holdings Limited (ASX:MAH): Time For A Financial Health Check
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Investors are always looking for growth in small-cap stocks like Macmahon Holdings Limited (ASX:MAH), with a market cap of AU$514m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into MAH here.
Does MAH produce enough cash relative to debt?
MAH’s debt levels surged from AU$8.8m to AU$106m over the last 12 months , which is mainly comprised of near term debt. With this growth in debt, the current cash and short-term investment levels stands at AU$110m , ready to deploy into the business. Moreover, MAH has generated AU$106m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 100%, indicating that MAH’s operating cash is sufficient to cover its debt. 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 1x cash from its debt capital.
Can MAH meet its short-term obligations with the cash in hand?
Looking at MAH’s AU$227m in current liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.37x. Usually, for Metals and Mining companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is MAH’s debt level acceptable?
With debt at 26% of equity, MAH may be thought of as appropriately levered. MAH is not taking on too much debt commitment, which may be constraining for future growth. We can test if MAH’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For MAH, the ratio of 14.6x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Next Steps:
MAH’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. In addition to this, 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 MAH has been performing in the past. I suggest you continue to research Macmahon Holdings to get a better picture 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 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.
