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Manchester United plc (NYSE:MANU) is a small-cap stock with a market capitalization of US$2.9b. 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? Understanding the company's financial health becomes crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. However, this is not a comprehensive overview, so I’d encourage you to dig deeper yourself into MANU here.
Does MANU Produce Much Cash Relative To Its Debt?
MANU has built up its total debt levels in the last twelve months, from UK£463m to UK£496m , which accounts for long term debt. With this growth in debt, the current cash and short-term investment levels stands at UK£194m to keep the business going. Additionally, MANU has produced UK£195m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 39%, meaning that MANU’s debt is appropriately covered by operating cash.
Does MANU’s liquid assets cover its short-term commitments?
With current liabilities at UK£352m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.09x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Entertainment companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Does MANU face the risk of succumbing to its debt-load?
Since total debt levels exceed equity, MANU is a highly 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. We can check to see whether MANU 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 MANU's, case, the ratio of 2.48x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as MANU’s low interest coverage already puts the company at higher risk of default.
MANU’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around MANU's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for MANU's financial health. Other important fundamentals need to be considered alongside. You should continue to research Manchester United to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for MANU’s future growth? Take a look at our free research report of analyst consensus for MANU’s outlook.
- Valuation: What is MANU 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 MANU 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 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.