Is Latrobe Magnesium Limited’s (ASX:LMG) Balance Sheet A Threat To Its Future?
Investors are always looking for growth in small-cap stocks like Latrobe Magnesium Limited (ASX:LMG), with a market cap of AU$10m. However, an important fact which most ignore is: how financially healthy is the business? Since LMG is loss-making right now, it’s crucial to evaluate the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, since I only look at basic financial figures, I recommend you dig deeper yourself into LMG here.
Does LMG produce enough cash relative to debt?
Over the past year, LMG has ramped up its debt from AU$495k to AU$922k , which is mainly comprised of near term debt. With this rise in debt, LMG’s cash and short-term investments stands at AU$51k for investing into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can take a look at some of LMG’s operating efficiency ratios such as ROA here.
Can LMG pay its short-term liabilities?
At the current liabilities level of AU$1m liabilities, it seems that the business may not be able to easily meet these obligations given the level of current assets of AU$1m, with a current ratio of 0.77x.
Is LMG’s debt level acceptable?
With debt at 14% of equity, LMG may be thought of as appropriately levered. LMG is not taking on too much debt commitment, which may be constraining for future growth. LMG’s risk around capital structure is low, and the company has the headroom and ability to raise debt should it need to in the future.
Next Steps:
LMG’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for LMG’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Latrobe Magnesium to get a more holistic view of the stock by looking at:
Historical Performance: What has LMG’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.
To help readers see past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
