While small-cap stocks, such as Motor Oil (Hellas) Corinth Refineries S.A. (ATH:MOH) with its market cap of €2.5b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is vital, since poor capital management may bring about 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 suggest you dig deeper yourself into MOH here.
MOH’s Debt (And Cash Flows)
MOH has shrunk its total debt levels in the last twelve months, from €994m to €930m – this includes long-term debt. With this debt repayment, MOH's cash and short-term investments stands at €679m to keep the business going. On top of this, MOH has generated cash from operations of €326m over the same time period, leading to an operating cash to total debt ratio of 35%, meaning that MOH’s current level of operating cash is high enough to cover debt.
Does MOH’s liquid assets cover its short-term commitments?
At the current liabilities level of €834m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.98x. The current ratio is the number you get when you divide current assets by current liabilities. For Oil and Gas 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 MOH face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 84%, MOH can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In MOH's case, the ratio of 9.56x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving MOH ample headroom to grow its debt facilities.
MOH’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. Since there is also no concerns around MOH's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how MOH has been performing in the past. You should continue to research Motor Oil (Hellas) Corinth Refineries to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for MOH’s future growth? Take a look at our free research report of analyst consensus for MOH’s outlook.
- Valuation: What is MOH 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 MOH 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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