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Is Micro Focus International plc’s (LON:MCRO) Balance Sheet Strong Enough To Weather A Storm?

Mercedes Harden

Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like Micro Focus International plc (LON:MCRO), with a market cap of UK£5.68b, are often out of the spotlight. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. Today we will look at MCRO’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Don’t forget that this is a general and concentrated examination of Micro Focus International’s financial health, so you should conduct further analysis into MCRO here.

See our latest analysis for Micro Focus International

Does MCRO produce enough cash relative to debt?

MCRO has built up its total debt levels in the last twelve months, from US$1.56b to US$4.91b , which comprises of short- and long-term debt. With this growth in debt, MCRO currently has US$573.7m remaining in cash and short-term investments for investing into the business. On top of this, MCRO has generated cash from operations of US$364.4m over the same time period, resulting in an operating cash to total debt ratio of 7.4%, signalling that MCRO’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In MCRO’s case, it is able to generate 0.074x cash from its debt capital.

Can MCRO meet its short-term obligations with the cash in hand?

With current liabilities at US$2.18b, it appears that the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.88x, which is below the prudent industry ratio of 3x.

LSE:MCRO Historical Debt September 17th 18
LSE:MCRO Historical Debt September 17th 18

Can MCRO service its debt comfortably?

With a debt-to-equity ratio of 60.2%, MCRO can be considered as an above-average leveraged company. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether MCRO 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 MCRO’s, case, the ratio of 2.83x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as MCRO’s low interest coverage already puts the company at higher risk of default.

Next Steps:

MCRO’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Furthermore, its lack of liquidity raises questions over current asset management practices for the mid-cap. I admit this is a fairly basic analysis for MCRO’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Micro Focus International to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for MCRO’s future growth? Take a look at our free research report of analyst consensus for MCRO’s outlook.

  2. Valuation: What is MCRO 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 MCRO is currently mispriced by the market.

  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.

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 editorial-team@simplywallst.com.