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MATAS A/S (CPSE:MATAS) is a small-cap stock with a market capitalization of Ø2.65B. 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? Companies operating in the Specialty Retail industry facing headwinds from current disruption, 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. However, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into MATAS here.
Does MATAS generate an acceptable amount of cash through operations?
MATAS’s debt level has been constant at around Ø1.56B over the previous year – this includes both the current and long-term debt. At this current level of debt, MATAS currently has Ø33.30M remaining in cash and short-term investments for investing into the business. Moreover, MATAS has produced cash from operations of Ø482.60M over the same time period, leading to an operating cash to total debt ratio of 30.91%, signalling that MATAS’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In MATAS’s case, it is able to generate 0.31x cash from its debt capital.
Can MATAS pay its short-term liabilities?
Looking at MATAS’s most recent Ø956.50M liabilities, the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.93x, which is below the prudent industry ratio of 3x.
Can MATAS service its debt comfortably?
MATAS is a relatively highly levered company with a debt-to-equity of 58.31%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether MATAS 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 MATAS’s, case, the ratio of 15.55x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving MATAS ample headroom to grow its debt facilities.