Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like Monro, Inc. (NASDAQ:MNRO), with a market cap of US$2.6b, are often out of the spotlight. However, history shows that overlooked mid-cap companies have performed better on a risk-adjusted manner than the smaller and larger segment of the market. Today we will look at MNRO’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. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into MNRO here.
Does MNRO produce enough cash relative to debt?
Over the past year, MNRO has reduced its debt from US$399m to US$370m , which also accounts for long term debt. With this debt payback, MNRO’s cash and short-term investments stands at US$3.6m , ready to deploy into the business. On top of this, MNRO has produced US$153m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 41%, indicating that MNRO’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In MNRO’s case, it is able to generate 0.41x cash from its debt capital.
Does MNRO’s liquid assets cover its short-term commitments?
Looking at MNRO’s US$213m in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$222m, with a current ratio of 1.05x. Generally, for Specialty Retail 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.
Can MNRO service its debt comfortably?
MNRO is a relatively highly levered company with a debt-to-equity of 54%. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. 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 5.1x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as MNRO’s high interest coverage is seen as responsible and safe practice.
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. Keep in mind I haven’t considered other factors such as how MNRO has been performing in the past. You should continue to research Monro to get a more holistic view of the mid-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.
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