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Are Mexco Energy Corporation’s (NYSEMKT:MXC) Interest Costs Too High?

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Simply Wall St
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Mexco Energy Corporation (NYSEMKT:MXC), which has zero-debt on its balance sheet, can maximize capital returns by increasing debt due to its lower cost of capital. However, the trade-off is MXC will have to follow strict debt obligations which will reduce its financial flexibility. While zero-debt makes the due diligence for potential investors less nerve-racking, it poses a new question: how should they assess the financial strength of such companies? I recommend you look at the following hurdles to assess MXC’s financial health.

See our latest analysis for Mexco Energy

Does MXC’s growth rate justify its decision for financial flexibility over lower cost of capital?

Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. Though, the trade-offs are that lenders require stricter capital management requirements, in addition to having a higher claim on company assets relative to shareholders. The lack of debt on MXC’s balance sheet may be because it does not have access to cheap capital, or it may believe this trade-off is not worth it. Choosing financial flexibility over capital returns make sense if MXC is a high-growth company. MXC’s revenue growth over the past year is a single-digit 9.3% which is relatively low for a small-cap company. While its low growth hardly justifies opting for zero-debt, the company may have high growth projects in the pipeline to justify the trade-off.

AMEX:MXC Historical Debt, March 6th 2019
AMEX:MXC Historical Debt, March 6th 2019

Does MXC’s liquid assets cover its short-term commitments?

Since Mexco Energy doesn’t have any debt on its balance sheet, it doesn’t have any solvency issues, which is a term used to describe the company’s ability to meet its long-term obligations. However, another measure of financial health is its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. At the current liabilities level of US$116k, it appears that the company has been able to meet these obligations given the level of current assets of US$513k, with a current ratio of 4.42x. Having said that, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.

Next Steps:

MXC is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Going forward, its financial position may change. This is only a rough assessment of financial health, and I’m sure MXC has company-specific issues impacting its capital structure decisions. You should continue to research Mexco Energy to get a more holistic view of the stock by looking at:

  1. Valuation: What is MXC 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 MXC is currently mispriced by the market.

  2. Historical Performance: What has MXC’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.

  3. 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 editorial-team@simplywallst.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.