Yahoo Finance Are Marshalls plc’s (LON:MSLH) Interest Costs Too High?
While small-cap stocks, such as Marshalls plc (LON:MSLH) with its market cap of UK£869m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into MSLH here.
How does MSLH’s operating cash flow stack up against its debt?
Over the past year, MSLH has ramped up its debt from UK£26m to UK£70m , which accounts for long term debt. With this growth in debt, MSLH currently has UK£21m remaining in cash and short-term investments , ready to deploy into the business. Additionally, MSLH has generated cash from operations of UK£52m during the same period of time, leading to an operating cash to total debt ratio of 75%, meaning that MSLH’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In MSLH’s case, it is able to generate 0.75x cash from its debt capital.
Does MSLH’s liquid assets cover its short-term commitments?
With current liabilities at UK£123m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.64x. Usually, for Basic Materials companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is MSLH’s debt level acceptable?
With a debt-to-equity ratio of 28%, MSLH’s debt level may be seen as prudent. MSLH is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether MSLH 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 MSLH’s, case, the ratio of 47.87x suggests that interest is comfortably 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:
MSLH’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure MSLH has company-specific issues impacting its capital structure decisions. You should continue to research Marshalls to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for MSLH’s future growth? Take a look at our free research report of analyst consensus for MSLH’s outlook.
Valuation: What is MSLH 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 MSLH 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.
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.
