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Investors are always looking for growth in small-cap stocks like Matador Resources Company (NYSE:MTDR), with a market cap of US$2.3b. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, this is just a partial view of the stock, and I suggest you dig deeper yourself into MTDR here.
Does MTDR Produce Much Cash Relative To Its Debt?
Over the past year, MTDR has ramped up its debt from US$574m to US$1.5b , which includes long-term debt. With this growth in debt, MTDR currently has US$21m remaining in cash and short-term investments , ready to be used for running the business. On top of this, MTDR has generated US$532m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 36%, signalling that MTDR’s current level of operating cash is high enough to cover debt.
Can MTDR pay its short-term liabilities?
Looking at MTDR’s US$328m in current liabilities, it appears that the company may not be able to easily meet these obligations given the level of current assets of US$230m, with a current ratio of 0.7x. The current ratio is the number you get when you divide current assets by current liabilities.
Does MTDR face the risk of succumbing to its debt-load?
MTDR is a relatively highly levered company with a debt-to-equity of 78%. 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 MTDR 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 MTDR's, case, the ratio of 5.86x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Although MTDR’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 low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I'm sure MTDR has company-specific issues impacting its capital structure decisions. I suggest you continue to research Matador Resources to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for MTDR’s future growth? Take a look at our free research report of analyst consensus for MTDR’s outlook.
- Historical Performance: What has MTDR'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 firstname.lastname@example.org. 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.