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What Investors Should Know About Mortice Limited's (LON:MORT) Financial Strength

Simply Wall St

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While small-cap stocks, such as Mortice Limited (LON:MORT) with its market cap of UK£5.8m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Understanding the company's financial health becomes crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, potential investors would need to take a closer look, and I suggest you dig deeper yourself into MORT here.

MORT’s Debt (And Cash Flows)

Over the past year, MORT has ramped up its debt from US$20m to US$23m , which accounts for long term debt. With this rise in debt, MORT currently has US$2.6m remaining in cash and short-term investments , ready to be used for running the business. Additionally, MORT has generated cash from operations of US$4.3m in the last twelve months, resulting in an operating cash to total debt ratio of 18%, meaning that MORT’s current level of operating cash is not high enough to cover debt.

Does MORT’s liquid assets cover its short-term commitments?

Looking at MORT’s US$57m in current liabilities, it seems that the business may not have an easy time meeting these commitments with a current assets level of US$57m, leading to a current ratio of 0.99x. The current ratio is the number you get when you divide current assets by current liabilities.

AIM:MORT Historical Debt, July 16th 2019

Is MORT’s debt level acceptable?

With total debt exceeding equity, MORT is considered a highly levered company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can test if MORT’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 MORT, the ratio of 2.4x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.

Next Steps:

Although MORT’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for MORT's financial health. Other important fundamentals need to be considered alongside. You should continue to research Mortice to get a more holistic view of the stock by looking at:

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

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.