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M.D.C. Holdings, Inc. (NYSE:MDC) is a small-cap stock with a market capitalization of US$2.0b. 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? Evaluating financial health as part of your investment thesis is vital, as mismanagement of capital can lead to 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, these checks don't give you a full picture, so I’d encourage you to dig deeper yourself into MDC here.
Does MDC Produce Much Cash Relative To Its Debt?
MDC has sustained its debt level by about US$1.1b over the last 12 months – this includes long-term debt. At this current level of debt, MDC currently has US$416m remaining in cash and short-term investments , ready to be used for running the business. Moreover, MDC has generated US$108m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 9.6%, signalling that MDC’s operating cash is less than its debt.
Can MDC pay its short-term liabilities?
With current liabilities at US$387m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 7.43x. The current ratio is the number you get when you divide current assets by current liabilities. Having said that, a ratio greater than 3x may be considered by some to be quite high, however this is not necessarily a negative for the company.
Does MDC face the risk of succumbing to its debt-load?
With debt reaching 70% of equity, MDC may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies.
Although MDC’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 MDC'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 MDC has company-specific issues impacting its capital structure decisions. I suggest you continue to research M.D.C. Holdings to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for MDC’s future growth? Take a look at our free research report of analyst consensus for MDC’s outlook.
- Valuation: What is MDC 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 MDC 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 firstname.lastname@example.org. 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.