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Is Metro Performance Glass Limited’s (NZSE:MPG) Balance Sheet A Threat To Its Future?

Investors are always looking for growth in small-cap stocks like Metro Performance Glass Limited (NZSE:MPG), with a market cap of NZ$98m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, this commentary is still very high-level, so I suggest you dig deeper yourself into MPG here.

How much cash does MPG generate through its operations?

MPG has sustained its debt level by about NZ$95m over the last 12 months – this includes long-term debt. At this constant level of debt, MPG currently has NZ$360k remaining in cash and short-term investments , ready to deploy into the business. On top of this, MPG has produced NZ$34m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 36%, meaning that MPG’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In MPG’s case, it is able to generate 0.36x cash from its debt capital.

Does MPG’s liquid assets cover its short-term commitments?

At the current liabilities level of NZ$40m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.76x. For Building 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.

NZSE:MPG Historical Debt November 25th 18
NZSE:MPG Historical Debt November 25th 18

Can MPG service its debt comfortably?

MPG is a relatively highly levered company with a debt-to-equity of 59%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if MPG’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 MPG, the ratio of 6.63x 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.

Next Steps:

Although MPG’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around MPG’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure MPG has company-specific issues impacting its capital structure decisions. I suggest you continue to research Metro Performance Glass to get a better picture of the small-cap by looking at:

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  1. Future Outlook: What are well-informed industry analysts predicting for MPG’s future growth? Take a look at our free research report of analyst consensus for MPG’s outlook.

  2. Valuation: What is MPG 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 MPG 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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.