What does Magellan Aerospace Corporation’s (TSE:MAL) Balance Sheet Tell Us About Its Future?
Investors are always looking for growth in small-cap stocks like Magellan Aerospace Corporation (TSX:MAL), with a market cap of CA$1.10B. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. However, I know these factors are very high-level, so I recommend you dig deeper yourself into MAL here.
How does MAL’s operating cash flow stack up against its debt?
MAL’s debt levels have fallen from CA$152.33M to CA$86.90M over the last 12 months – this includes both the current and long-term debt. With this reduction in debt, MAL currently has CA$40.39M remaining in cash and short-term investments for investing into the business. Additionally, MAL has generated cash from operations of CA$129.95M over the same time period, resulting in an operating cash to total debt ratio of 149.54%, meaning that MAL’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 MAL’s case, it is able to generate 1.5x cash from its debt capital.
Does MAL’s liquid assets cover its short-term commitments?
With current liabilities at CA$213.41M, the company has been able to meet these obligations given the level of current assets of CA$445.51M, with a current ratio of 2.09x. Generally, for Aerospace & Defense companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is MAL’s debt level acceptable?
MAL’s level of debt is appropriate relative to its total equity, at 12.52%. This range is considered safe as MAL is not taking on too much debt obligation, which may be constraining for future growth. We can test if MAL’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 MAL, the ratio of 24.69x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as MAL’s high interest coverage is seen as responsible and safe practice.
Next Steps:
MAL has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how MAL has been performing in the past. I recommend you continue to research Magellan Aerospace to get a better picture of the stock by looking at:
1. Future Outlook: What are well-informed industry analysts predicting for MAL’s future growth? Take a look at our free research report of analyst consensus for MAL’s outlook.
2. Valuation: What is MAL 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 MAL 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 pass 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.
