MTS Systems Corporation (NASDAQ:MTSC) is a small-cap stock with a market capitalization of $906.61M. 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? Companies operating in the Electronic industry, even ones that are profitable, tend to be high risk. So, understanding the company’s financial health becomes vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, since I only look at basic financial figures, I suggest you dig deeper yourself into MTSC here.
Does MTSC generate enough cash through operations?
MTSC’s debt level has been constant at around $457.6M over the previous year made up of current and long term debt. At this current level of debt, MTSC’s cash and short-term investments stands at $112.2M for investing into the business. On top of this, MTSC has produced $71.7M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 15.66%, meaning that MTSC’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In MTSC’s case, it is able to generate 0.16x cash from its debt capital.
Does MTSC’s liquid assets cover its short-term commitments?
With current liabilities at $247.4M, it appears that the company has been able to meet these obligations given the level of current assets of $457.2M, with a current ratio of 1.85x. For Electronic companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can MTSC service its debt comfortably?
MTSC is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether MTSC 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 MTSC’s, case, the ratio of 2.17x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as MTSC’s low interest coverage already puts the company at higher risk of default.
MTSC’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, its high liquidity means the company should continue to operate smoothly in the case of adverse events. Keep in mind I haven’t considered other factors such as how MTSC has been performing in the past. I suggest you continue to research MTS Systems to get a better picture of the stock by looking at:
- 1. Future Outlook: What are well-informed industry analysts predicting for MTSC’s future growth? Take a look at our free research report of analyst consensus for MTSC’s outlook.
- 2. Valuation: What is MTSC 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 MTSC is currently mispriced by the market.
- 3. 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.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.