While small-cap stocks, such as Malkowski-Martech Spólka Akcyjna (WSE:MMA) with its market cap of zł3.8m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that MMA is not presently profitable, it’s vital to understand the current state of its operations and pathway to profitability. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, these checks don't give you a full picture, so I’d encourage you to dig deeper yourself into MMA here.
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Does MMA Produce Much Cash Relative To Its Debt?
Over the past year, MMA has reduced its debt from zł10m to zł9.3m , which includes long-term debt. With this debt repayment, the current cash and short-term investment levels stands at zł189k , ready to be used for running the business. However, MMA is only producing zł98k in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of less than 1x, indicating that the current level of operating cash is less than debt.
Can MMA pay its short-term liabilities?
With current liabilities at zł11m, the company has been able to meet these obligations given the level of current assets of zł15m, with a current ratio of 1.37x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Building companies, this is a reasonable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is MMA’s debt level acceptable?
MMA is a relatively highly levered company with a debt-to-equity of 81%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. However, since MMA is currently loss-making, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
MMA’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for MMA's financial health. Other important fundamentals need to be considered alongside. You should continue to research Malkowski-Martech Spólka Akcyjna to get a better picture of the small-cap by looking at:
- Historical Performance: What has MMA's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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.
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