What does McDermott International Inc’s (NYSE:MDR) Balance Sheet Tell Us About Its Future?
Investors are always looking for growth in small-cap stocks like McDermott International Inc (NYSE:MDR), with a market cap of US$1.73B. However, an important fact which most ignore is: how financially healthy is the business? Energy Services companies, even ones that are profitable, tend to be high risk. Assessing first and foremost the financial health is crucial. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, this commentary is still very high-level, so I recommend you dig deeper yourself into MDR here.
Does MDR generate an acceptable amount of cash through operations?
MDR has shrunken its total debt levels in the last twelve months, from US$752.52M to US$536.98M , which comprises of short- and long-term debt. With this debt repayment, the current cash and short-term investment levels stands at US$390.26M , ready to deploy into the business. Moreover, MDR has generated US$135.80M in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 25.29%, meaning that MDR’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In MDR’s case, it is able to generate 0.25x cash from its debt capital.
Can MDR pay its short-term liabilities?
Looking at MDR’s most recent US$706.93M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$1.43B, with a current ratio of 2.03x. Usually, for Energy Services companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Can MDR service its debt comfortably?
With a debt-to-equity ratio of 30.02%, MDR’s debt level may be seen as prudent. This range is considered safe as MDR is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if MDR’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 MDR, the ratio of 5.29x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as MDR’s high interest coverage is seen as responsible and safe practice.
Next Steps:
MDR’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure MDR has company-specific issues impacting its capital structure decisions. I suggest you continue to research McDermott International to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for MDR’s future growth? Take a look at our free research report of analyst consensus for MDR’s outlook.
Valuation: What is MDR 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 MDR is currently mispriced by the market.
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.
