What Investors Should Know About Morgan Sindall Group plc’s (LON:MGNS) Financial Strength
Morgan Sindall Group plc (LSE:MGNS) is a small-cap stock with a market capitalization of £598.78M. 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? Assessing first and foremost the financial health is crucial, 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. Nevertheless, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into MGNS here.
How does MGNS’s operating cash flow stack up against its debt?
MGNS has shrunken its total debt levels in the last twelve months, from £61.2M to £21.0M – this includes both the current and long-term debt. With this debt repayment, MGNS currently has £228.5M remaining in cash and short-term investments for investing into the business. Moreover, MGNS has produced cash from operations of £178.7M in the last twelve months, leading to an operating cash to total debt ratio of 850.95%, meaning that MGNS’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In MGNS’s case, it is able to generate 8.51x cash from its debt capital.
Does MGNS’s liquid assets cover its short-term commitments?
At the current liabilities level of £761.3M liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.02x. Usually, for Construction companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can MGNS service its debt comfortably?
With debt at 5.61% of equity, MGNS may be thought of as having low leverage. This range is considered safe as MGNS is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether MGNS 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 MGNS’s, case, the ratio of 30.44x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as MGNS’s high interest coverage is seen as responsible and safe practice.
Next Steps:
MGNS has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure MGNS has company-specific issues impacting its capital structure decisions. You should continue to research Morgan Sindall Group to get a more holistic view of the stock by looking at:
1. Future Outlook: What are well-informed industry analysts predicting for MGNS’s future growth? Take a look at our free research report of analyst consensus for MGNS’s outlook.
2. Valuation: What is MGNS 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 MGNS 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.
