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How Financially Strong Is Mistras Group, Inc. (NYSE:MG)?

Brandon Murphy

Investors are always looking for growth in small-cap stocks like Mistras Group, Inc. (NYSE:MG), with a market cap of US$422m. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. However, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into MG here.

Does MG produce enough cash relative to debt?

MG’s debt levels surged from US$119m to US$164m over the last 12 months , which accounts for long term debt. With this growth in debt, MG currently has US$17m remaining in cash and short-term investments , ready to deploy into the business. On top of this, MG has produced cash from operations of US$44m over the same time period, leading to an operating cash to total debt ratio of 27%, indicating that MG’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In MG’s case, it is able to generate 0.27x cash from its debt capital.

Can MG pay its short-term liabilities?

At the current liabilities level of US$95m, it appears that the company has been able to meet these obligations given the level of current assets of US$199m, with a current ratio of 2.09x. For Professional Services companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

NYSE:MG Historical Debt January 28th 19
NYSE:MG Historical Debt January 28th 19

Does MG face the risk of succumbing to its debt-load?

MG is a relatively highly levered company with a debt-to-equity of 59%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether MG is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In MG’s, case, the ratio of 4.35x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving MG ample headroom to grow its debt facilities.

Next Steps:

Although MG’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around MG’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure MG has company-specific issues impacting its capital structure decisions. I recommend you continue to research Mistras Group to get a more holistic view of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for MG’s future growth? Take a look at our free research report of analyst consensus for MG’s outlook.

  2. Valuation: What is MG 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 MG 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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.