Investors are always looking for growth in small-cap stocks like Metro Mining Limited (ASX:MMI), with a market cap of AU$201m. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Oil and Gas industry, in particular ones that run negative earnings, tend to be high risk. Evaluating financial health as part of your investment thesis is vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, I know these factors are very high-level, so I recommend you dig deeper yourself into MMI here.
Does MMI produce enough cash relative to debt?
Over the past year, MMI has ramped up its debt from AU$15m to AU$44m , which is made up of current and long term debt. With this increase in debt, the current cash and short-term investment levels stands at AU$23m for investing into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of MMI’s operating efficiency ratios such as ROA here.
Does MMI’s liquid assets cover its short-term commitments?
With current liabilities at AU$27m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.67x. Generally, for Oil and Gas companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Is MMI’s debt level acceptable?
MMI’s level of debt is appropriate relative to its total equity, at 37%. This range is considered safe as MMI is not taking on too much debt obligation, which may be constraining for future growth. Investors’ risk associated with debt is very low with MMI, and the company has plenty of headroom and ability to raise debt should it need to in the future.
MMI’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure MMI has company-specific issues impacting its capital structure decisions. You should continue to research Metro Mining to get a better picture of the stock by looking at:
- Historical Performance: What has MMI’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.
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.