What Investors Should Know About Macro Enterprises Inc.'s (CVE:MCR) Financial Strength
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Macro Enterprises Inc. (CVE:MCR) is a small-cap stock with a market capitalization of CA$125m. 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? Understanding the company's financial health becomes essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, this is just a partial view of the stock, and I recommend you dig deeper yourself into MCR here.
MCR’s Debt (And Cash Flows)
Over the past year, MCR has ramped up its debt from CA$7.0m to CA$59m , which accounts for long term debt. With this increase in debt, MCR's cash and short-term investments stands at CA$46m , ready to be used for running the business. On top of this, MCR has produced cash from operations of CA$21m in the last twelve months, resulting in an operating cash to total debt ratio of 35%, signalling that MCR’s current level of operating cash is high enough to cover debt.
Does MCR’s liquid assets cover its short-term commitments?
Looking at MCR’s CA$103m in current liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.45x. The current ratio is calculated by dividing current assets by current liabilities. For Energy 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.
Is MCR’s debt level acceptable?
With debt reaching 62% of equity, MCR may be thought of as relatively highly levered. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if MCR’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 MCR, the ratio of 11.24x suggests that interest is comfortably covered, which means that lenders may be willing to lend out more funding as MCR’s high interest coverage is seen as responsible and safe practice.
Next Steps:
MCR’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around MCR's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for MCR's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Macro Enterprises to get a better picture of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for MCR’s future growth? Take a look at our free research report of analyst consensus for MCR’s outlook.
Valuation: What is MCR 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 MCR 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
