Are Magnolia Petroleum Plc’s (AIM:MAGP) Interest Costs Too High?
Investors are always looking for growth in small-cap stocks like Magnolia Petroleum Plc (AIM:MAGP), with a market cap of GBP $1.25M. However, an important fact which most ignore is: how financially healthy is the company? The significance of doing due diligence on a company’s financial strength stems from the fact that over 20,000 companies go bankrupt in every quarter in the US alone. Thus, it becomes utmost important for an investor to test a company’s resilience for such contingencies. In simple terms, I believe these three small calculations tell most of the story you need to know. Check out our latest analysis for Magnolia Petroleum
Does MAGP generate an acceptable amount of cash through operations?
Unxpected adverse events, such as natural disasters and wars, can be a true test of a company’s capacity to meet its obligations. These adverse events bring devastation and yet does not absolve the company from its debt. We can test the impact of these adverse events by looking at whether cash from its current operations can pay back its current debt obligations. MAGP’s recent operating cash flow was 0.01 times its debt within the past year. An annual operating cash flow of less than a tenth of the overall debt raises red flags, although short-term obstacles and business cyclicality may temporarily impact MAGP’s ability to generate cash.
Can MAGP meet its short-term obligations with the cash in hand?
What about its commitments to other stakeholders such as payments to suppliers and employees? During times of unfavourable events, MAGP could be required to liquidate some of its assets to meet these upcoming payments, as cash flow from operations is hindered. We should examine if the company’s cash and short-term investment levels match its current liabilities. Our analysis shows that MAGP is unable to meet all of its upcoming commitments with its cash and other short-term assets. While this is not abnormal for companies, as their cash is better invested in the business or returned to investors than lying around, it does bring about some concerns should any unfavourable circumstances arise.
Can MAGP service its debt comfortably?
While ideally the debt-to equity ratio of a financially healthy company should be less than 40%, several factors such as industry life-cycle and economic conditions can result in a company raising a significant amount of debt. For MAGP, the debt-to-equity ratio stands at above 100%, which indicates that the company is holding a high level of debt relative to its net worth. In the event of financial turmoil, the company may experience difficulty meeting interest and other debt obligations.
Next Steps:
Are you a shareholder? MAGP’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. In addition to this, the company may struggle to meet its near term liabilities should an adverse event occur. In the future, its financial position may change. I suggest keeping on top of market expectations for MAGP’s future growth on our free analysis platform.
Are you a potential investor? MAGP’s high debt levels on top of poor cash coverage as well as low liquidity coverage of short-term obligations may send potential investors running the other way. Though, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of MAGP’s track record. As a following step, you should take a look at MAGP’s past performance analysis on our free platform to conclude on MAGP’s financial health.
To help readers see pass 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.
