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Magnum Mining and Exploration Limited (ASX:MGU) is a small-cap stock with a market capitalization of AU$24m. 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? Since MGU is loss-making right now, it’s vital to understand 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, these checks don't give you a full picture, so I’d encourage you to dig deeper yourself into MGU here.
MGU’s Debt (And Cash Flows)
MGU has increased its debt level by about AU$849k over the last 12 months , which is mainly comprised of near term debt. With this increase in debt, MGU's cash and short-term investments stands at AU$901k to keep the business going. We note it produced negative cash flow over the last twelve months. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of MGU’s operating efficiency ratios such as ROA here.
Can MGU meet its short-term obligations with the cash in hand?
At the current liabilities level of AU$1.5m, it appears that the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.68x. The current ratio is the number you get when you divide current assets by current liabilities.
Can MGU service its debt comfortably?
With debt reaching 49% of equity, MGU may be thought of as relatively highly levered. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. However, since MGU is presently loss-making, 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 MGU’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. Though its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I'm sure MGU has company-specific issues impacting its capital structure decisions. I suggest you continue to research Magnum Mining and Exploration to get a more holistic view of the stock by looking at:
- Historical Performance: What has MGU'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.
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 email@example.com. 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.