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McMillan Shakespeare Limited (ASX:MMS): Time For A Financial Health Check

While small-cap stocks, such as McMillan Shakespeare Limited (ASX:MMS) with its market cap of AU$1.2b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is crucial, as mismanagement of capital can lead to 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, since I only look at basic financial figures, I suggest you dig deeper yourself into MMS here.

Does MMS produce enough cash relative to debt?

MMS’s debt level has been constant at around AU$338m over the previous year – this includes long-term debt. At this constant level of debt, MMS currently has AU$100m remaining in cash and short-term investments for investing into the business. On top of this, MMS has generated cash from operations of AU$118m over the same time period, resulting in an operating cash to total debt ratio of 35%, indicating that MMS’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 MMS’s case, it is able to generate 0.35x cash from its debt capital.

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

Looking at MMS’s AU$150m in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.08x. For Professional Services companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.

ASX:MMS Historical Debt December 4th 18
ASX:MMS Historical Debt December 4th 18

Can MMS service its debt comfortably?

MMS is a relatively highly levered company with a debt-to-equity of 91%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether MMS 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 MMS’s, case, the ratio of 14.37x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving MMS ample headroom to grow its debt facilities.

Next Steps:

MMS’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how MMS has been performing in the past. I suggest you continue to research McMillan Shakespeare to get a more holistic view of the small-cap by looking at:

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  1. Future Outlook: What are well-informed industry analysts predicting for MMS’s future growth? Take a look at our free research report of analyst consensus for MMS’s outlook.

  2. Valuation: What is MMS 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 MMS is currently mispriced by the market.

  3. 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.