Investors are always looking for growth in small-cap stocks like Mainfreight Limited (NZSE:MFT), with a market cap of NZ$2.8b. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, this commentary is still very high-level, so I suggest you dig deeper yourself into MFT here.
How much cash does MFT generate through its operations?
MFT has sustained its debt level by about NZ$277m over the last 12 months comprising of short- and long-term debt. At this stable level of debt, MFT’s cash and short-term investments stands at NZ$81m , ready to deploy into the business. Additionally, MFT has generated NZ$140m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 51%, signalling that MFT’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In MFT’s case, it is able to generate 0.51x cash from its debt capital.
Can MFT meet its short-term obligations with the cash in hand?
With current liabilities at NZ$363m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.41x. For Logistics companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Does MFT face the risk of succumbing to its debt-load?
With debt at 39% of equity, MFT may be thought of as appropriately levered. This range is considered safe as MFT is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether MFT is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In MFT’s, case, the ratio of 23.76x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as MFT’s high interest coverage is seen as responsible and safe practice.
MFT’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how MFT has been performing in the past. You should continue to research Mainfreight to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for MFT’s future growth? Take a look at our free research report of analyst consensus for MFT’s outlook.
- Valuation: What is MFT 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 MFT 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.
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 firstname.lastname@example.org.