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Is Microgen plc's (LON:MCGN) Balance Sheet Strong Enough To Weather A Storm?

Simply Wall St

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Investors are always looking for growth in small-cap stocks like Microgen plc (LON:MCGN), with a market cap of UK£251m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. However, this is not a comprehensive overview, so I recommend you dig deeper yourself into MCGN here.

MCGN’s Debt (And Cash Flows)

Over the past year, MCGN has ramped up its debt from UK£9.8m to UK£12m – this includes long-term debt. With this growth in debt, MCGN's cash and short-term investments stands at UK£29m , ready to be used for running the business. On top of this, MCGN has produced cash from operations of UK£12m in the last twelve months, leading to an operating cash to total debt ratio of 98%, meaning that MCGN’s operating cash is sufficient to cover its debt.

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

With current liabilities at UK£39m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.16x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Software companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

LSE:MCGN Historical Debt, March 27th 2019

Is MCGN’s debt level acceptable?

MCGN’s level of debt is appropriate relative to its total equity, at 18%. This range is considered safe as MCGN is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether MCGN 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 MCGN's, case, the ratio of 28.2x 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.

Next Steps:

MCGN’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I'm sure MCGN has company-specific issues impacting its capital structure decisions. You should continue to research Microgen to get a better picture of the stock by looking at:

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

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.