MTQ Corporation Limited (SGX:M05) is a small-cap stock with a market capitalization of SGD54.08M. 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 energy services industry, especially ones that are currently loss-making, are more likely to be higher risk. So, understanding the company’s financial health becomes essential. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into M05 here.
Does M05 generate an acceptable amount of cash through operations?
Over the past year, M05 has reduced its debt from SGD44.1M to SGD41.7M , which comprises of short- and long-term debt. With this debt payback, M05’s cash and short-term investments stands at SGD31.4M , ready to deploy into the business. Additionally, M05 has produced SGD0.2M in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 0.46%, indicating that M05’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires positive earnings. In M05’s case, it is able to generate 0x cash from its debt capital.
Does M05’s liquid assets cover its short-term commitments?
Looking at M05’s most recent SGD30.5M liabilities, it appears that the company has been able to meet these commitments with a current assets level of SGD95.8M, leading to a 3.14x current account ratio. However, anything above 3x is considered high and could mean that M05 has too much idle capital in low-earning investments.
Can M05 service its debt comfortably?
M05’s level of debt is appropriate relative to its total equity, at 25.91%. This range is considered safe as M05 is not taking on too much debt obligation, which may be constraining for future growth. Risk around debt is very low for M05, and the company also has the ability and headroom to increase debt if needed going forward.
Next Steps:
Are you a shareholder? M05’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Given that its financial position may be different. You should always be researching market expectations for M05’s future growth on our free analysis platform.