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Investors are always looking for growth in small-cap stocks like Metals Exploration plc (LON:MTL), with a market cap of UK£17m. However, an important fact which most ignore is: how financially healthy is the business? Since MTL is loss-making right now, it’s crucial to evaluate the current state of its operations and pathway to profitability. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, this is not a comprehensive overview, so I recommend you dig deeper yourself into MTL here.
MTL’s Debt (And Cash Flows)
MTL's debt levels surged from US$87m to US$93m over the last 12 months , which includes long-term debt. With this increase in debt, MTL currently has US$1.3m remaining in cash and short-term investments , ready to be used for running the business. Its negative operating cash flow means calculating cash-to-debt wouldn't be useful. For this article’s sake, I won’t be looking at this today, but you can take a look at some of MTL’s operating efficiency ratios such as ROA here.
Can MTL meet its short-term obligations with the cash in hand?
With current liabilities at US$65m, it seems that the business may not be able to easily meet these obligations given the level of current assets of US$7.2m, with a current ratio of 0.11x. The current ratio is calculated by dividing current assets by current liabilities.
Can MTL service its debt comfortably?
With debt reaching 79% of equity, MTL may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. But since MTL is presently unprofitable, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
MTL’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. Though its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for MTL's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Metals Exploration to get a more holistic view of the stock by looking at:
- Historical Performance: What has MTL'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.