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Investors are always looking for growth in small-cap stocks like Methode Electronics, Inc. (NYSE:MEI), with a market cap of US$1.0b. However, an important fact which most ignore is: how financially healthy is the business? Electronic companies, even ones that are profitable, are inclined towards being higher risk. So, understanding the company’s financial health becomes crucial. I believe these basic checks tell most of the story you need to know. However, since I only look at basic financial figures, I recommend you dig deeper yourself into MEI here.
Does MEI produce enough cash relative to debt?
MEI has built up its total debt levels in the last twelve months, from US$108m to US$358m – this includes long-term debt. With this growth in debt, MEI’s cash and short-term investments stands at US$111m , ready to deploy into the business. Moreover, MEI has produced cash from operations of US$109m in the last twelve months, leading to an operating cash to total debt ratio of 30%, meaning that MEI’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In MEI’s case, it is able to generate 0.3x cash from its debt capital.
Does MEI’s liquid assets cover its short-term commitments?
At the current liabilities level of US$192m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.56x. Generally, for Electronic companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Can MEI service its debt comfortably?
MEI is a relatively highly levered company with a debt-to-equity of 56%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In MEI’s case, the ratio of 47.7x suggests that interest is comfortably 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.
MEI’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 MEI’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how MEI has been performing in the past. You should continue to research Methode Electronics to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for MEI’s future growth? Take a look at our free research report of analyst consensus for MEI’s outlook.
- Valuation: What is MEI 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 MEI 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.
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