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While small-cap stocks, such as MaxLinear, Inc. (NYSE:MXL) with its market cap of US$1.7b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since MXL is loss-making right now, it’s vital to assess the current state of its operations and pathway to profitability. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, this is just a partial view of the stock, and I suggest you dig deeper yourself into MXL here.
Does MXL Produce Much Cash Relative To Its Debt?
Over the past year, MXL has reduced its debt from US$323m to US$267m , which includes long-term debt. With this debt repayment, MXL's cash and short-term investments stands at US$71m , ready to be used for running the business. On top of this, MXL has generated US$107m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 40%, signalling that MXL’s current level of operating cash is high enough to cover debt.
Does MXL’s liquid assets cover its short-term commitments?
With current liabilities at US$73m, it seems that the business has been able to meet these commitments with a current assets level of US$179m, leading to a 2.44x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. For Semiconductor companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can MXL service its debt comfortably?
With a debt-to-equity ratio of 59%, MXL can be considered as an above-average leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. But since MXL is currently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Although MXL’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 MXL's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for MXL's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research MaxLinear to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for MXL’s future growth? Take a look at our free research report of analyst consensus for MXL’s outlook.
- Valuation: What is MXL 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 MXL 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.