Investors are always looking for growth in small-cap stocks like Mineral Resources Limited (ASX:MIN), with a market cap of AU$3.2b. However, an important fact which most ignore is: how financially healthy is the business? Understanding the company's financial health becomes crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, these checks don't give you a full picture, so I’d encourage you to dig deeper yourself into MIN here.
MIN’s Debt (And Cash Flows)
Over the past year, MIN has ramped up its debt from AU$226m to AU$789m – this includes long-term debt. With this increase in debt, MIN currently has AU$136m remaining in cash and short-term investments to keep the business going. Additionally, MIN has produced AU$262m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 33%, indicating that MIN’s current level of operating cash is high enough to cover debt.
Can MIN pay its short-term liabilities?
At the current liabilities level of AU$372m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.41x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Metals and Mining companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is MIN’s debt level acceptable?
With debt reaching 64% of equity, MIN may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can check to see whether MIN 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 MIN's, case, the ratio of 23.33x 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.
Although MIN’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I'm sure MIN has company-specific issues impacting its capital structure decisions. I suggest you continue to research Mineral Resources to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for MIN’s future growth? Take a look at our free research report of analyst consensus for MIN’s outlook.
- Valuation: What is MIN 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 MIN 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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