Modine Manufacturing Company (NYSE:MOD) is a small-cap stock with a market capitalization of US$776m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Evaluating financial health as part of your investment thesis is vital, 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 just a partial view of the stock, and I suggest you dig deeper yourself into MOD here.
MOD’s Debt (And Cash Flows)
MOD's debt level has been constant at around US$467m over the previous year – this includes long-term debt. At this stable level of debt, the current cash and short-term investment levels stands at US$31m to keep the business going. Moreover, MOD has produced cash from operations of US$85m during the same period of time, leading to an operating cash to total debt ratio of 18%, indicating that MOD’s current level of operating cash is not high enough to cover debt.
Can MOD pay its short-term liabilities?
With current liabilities at US$475m, the company has been able to meet these obligations given the level of current assets of US$615m, with a current ratio of 1.3x. The current ratio is calculated by dividing current assets by current liabilities. For Auto Components companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can MOD service its debt comfortably?
With debt reaching 86% of equity, MOD 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 test if MOD’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For MOD, the ratio of 5.34x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving MOD ample headroom to grow its debt facilities.
Although MOD’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. Since there is also no concerns around MOD's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for MOD's financial health. Other important fundamentals need to be considered alongside. You should continue to research Modine Manufacturing to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for MOD’s future growth? Take a look at our free research report of analyst consensus for MOD’s outlook.
- Historical Performance: What has MOD'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.
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