Does Micron Solutions Inc’s (MICR) Debt Level Pose A Serious Problem?
Investors are always looking for growth in small-cap stocks like Micron Solutions Inc (AMEX:MICR), with a market cap of USD $10.24M. However, an important fact which most ignore is: how financially healthy is the company? The significance of doing due diligence on a company’s financial strength stems from the fact that over 20,000 companies go bankrupt in every quarter in the US alone. Thus, it becomes utmost important for an investor to test a company’s resilience for such contingencies. In simple terms, I believe these three small calculations tell most of the story you need to know. See our latest analysis for MICR
Does MICR generate enough cash through operations?
While failure to manage cash has been one of the major reasons behind the demise of a lot of small businesses, mismanagement comes into the light during tough situations such as an economic recession. Furthermore, failure to service debt can hurt its reputation, making funding expensive in the future. Fortunately, we can test the company’s capacity to pay back its debtholders without summoning any catastrophes by looking at how much cash it generates from its current operations. Last year, MICR’s operating cash flow was 0x its current debt. This means what MICR can generate on an annual basis, which is currently a negative value, does not cover what it actually owes its debtors in the near term. This raises a red flag, looking at MICR’s operations at this point in time.
Can MICR meet its short-term obligations with the cash in hand?
What about its commitments to other stakeholders such as payments to suppliers and employees? As cash flow from operation is hindered by adverse events, MICR may need to liquidate its short-term assets to meet these upcoming payments. We test for MICR’s ability to meet these needs by comparing its cash and short-term investments with current liabilities. Our analysis shows that MICR is unable to meet all of its upcoming commitments with its cash and other short-term assets. While this is not abnormal for companies, as their cash is better invested in the business or returned to investors than lying around, it does bring about some concerns should any unfavourable circumstances arise.
Can MICR service its debt comfortably?
A substantially higher debt poses a significant threat to a company’s profitability during a downturn. In the case of MICR, the debt-to-equity ratio is over 100%, which means that it is a highly leveraged company. This is not a problem if the company has consistently grown its profits. But during a business downturn, as liquidity may dry up, making it hard to operate.
Next Steps:
Are you a shareholder? MICR’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. In addition to this, the company may struggle to meet its near term liabilities should an adverse event occur. In the future, its financial position may change. I recommend researching market expectations for MICR’s future growth on our free analysis platform.
Are you a potential investor? MICR’s large debt ratio on top of poor cash coverage as well as low liquidity coverage of near-term commitments may not build the strongest investment case. But, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of MICR’s track record. You should continue your analysis by taking a look at MICR’s past performance analysis on our free platform to conclude on MICR’s financial health.
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.
