Moreton Resources Limited (ASX:MRV) is a small-cap stock with a market capitalization of A$33.84M. 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? Oil and Gas companies, especially ones that are currently loss-making, are more likely to be higher risk. So, understanding the company’s financial health becomes crucial. 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’d encourage you to dig deeper yourself into MRV here.
Does MRV generate an acceptable amount of cash through operations?
Over the past year, MRV has borrowed debt capital of around A$3.0M . With this increase in debt, MRV’s cash and short-term investments stands at A$2.7M for investing into the business. However, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of MRV’s operating efficiency ratios such as ROA here.
Can MRV meet its short-term obligations with the cash in hand?
Looking at MRV’s most recent A$3.4M liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.4x. Generally, for oil and gas companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is MRV’s level of debt at an acceptable level?
With debt at 29.22% of equity, MRV may be thought of as appropriately levered. This range is considered safe as MRV is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. Investors’ risk associated with debt is very low with MRV, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Next Steps:
Are you a shareholder? MRV’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Given that MRV’s financial situation may change. I suggest keeping abreast of market expectations for MRV’s future growth on our free analysis platform.