Yahoo Finance What Investors Should Know About Mercury NZ Limited's (NZSE:MCY) Financial Strength
Mercury NZ Limited (NZSE:MCY) is a small-cap stock with a market capitalization of NZ$5.3b. 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? Understanding the company's financial health becomes crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, this is not a comprehensive overview, so I suggest you dig deeper yourself into MCY here.
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Does MCY Produce Much Cash Relative To Its Debt?
Over the past year, MCY has ramped up its debt from NZ$1.2b to NZ$1.4b , which includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at NZ$78m , ready to be used for running the business. On top of this, MCY has generated NZ$325m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 23%, indicating that MCY’s operating cash is sufficient to cover its debt.
Can MCY meet its short-term obligations with the cash in hand?
Looking at MCY’s NZ$583m in current liabilities, it appears that the company may not be able to easily meet these obligations given the level of current assets of NZ$513m, with a current ratio of 0.88x. The current ratio is the number you get when you divide current assets by current liabilities.
Is MCY’s debt level acceptable?
With debt reaching 44% of equity, MCY 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 check to see whether MCY 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 MCY's, case, the ratio of 4.34x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving MCY ample headroom to grow its debt facilities.
Next Steps:
Although MCY’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for MCY's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Mercury NZ to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for MCY’s future growth? Take a look at our free research report of analyst consensus for MCY’s outlook.
Valuation: What is MCY 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 MCY 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 editorial-team@simplywallst.com. 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.
