Investors are always looking for growth in small-cap stocks like Arnoldo Mondadori Editore S.p.A. (BIT:MN), with a market cap of €442m. However, an important fact which most ignore is: how financially healthy is the business? Understanding the company's financial health becomes essential, 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, potential investors would need to take a closer look, and I suggest you dig deeper yourself into MN here.
Does MN Produce Much Cash Relative To Its Debt?
Over the past year, MN has reduced its debt from €259m to €242m , which also accounts for long term debt. With this reduction in debt, the current cash and short-term investment levels stands at €82m to keep the business going. Moreover, MN has produced cash from operations of €54m over the same time period, resulting in an operating cash to total debt ratio of 22%, signalling that MN’s current level of operating cash is high enough to cover debt.
Can MN meet its short-term obligations with the cash in hand?
With current liabilities at €683m, the company has been able to meet these obligations given the level of current assets of €770m, with a current ratio of 1.13x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Media companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Can MN service its debt comfortably?
With total debt exceeding equity, MN is considered a highly levered company. 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 test if MN’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 MN, the ratio of 13.31x 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.
MN’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 MN's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for MN's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Arnoldo Mondadori Editore to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for MN’s future growth? Take a look at our free research report of analyst consensus for MN’s outlook.
- Valuation: What is MN 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 MN 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 email@example.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.