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Investors are always looking for growth in small-cap stocks like Monro, Inc. (NASDAQ:MNRO), with a market cap of US$2.6b. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health 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. Nevertheless, these checks don't give you a full picture, so I recommend you dig deeper yourself into MNRO here.
Does MNRO Produce Much Cash Relative To Its Debt?
MNRO has sustained its debt level by about US$398m over the last 12 months including long-term debt. At this constant level of debt, MNRO currently has US$6.2m remaining in cash and short-term investments to keep the business going. On top of this, MNRO has produced US$153m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 38%, indicating that MNRO’s current level of operating cash is high enough to cover debt.
Can MNRO meet its short-term obligations with the cash in hand?
Looking at MNRO’s US$218m in current liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.1x. The current ratio is the number you get when you divide current assets by current liabilities. For Specialty Retail companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does MNRO face the risk of succumbing to its debt-load?
MNRO is a relatively highly levered company with a debt-to-equity of 57%. 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 MNRO’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 MNRO, the ratio of 4.95x suggests that interest is appropriately 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.
MNRO’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for MNRO's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Monro to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for MNRO’s future growth? Take a look at our free research report of analyst consensus for MNRO’s outlook.
- Valuation: What is MNRO 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 MNRO 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.
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 firstname.lastname@example.org. 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.