Investors are always looking for growth in small-cap stocks like Manz AG (ETR:M5Z), with a market cap of €201m. However, an important fact which most ignore is: how financially healthy is the business? Given that M5Z is not presently profitable, it’s crucial to assess the current state of its operations and pathway to profitability. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, this is not a comprehensive overview, so I’d encourage you to dig deeper yourself into M5Z here.
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Does M5Z Produce Much Cash Relative To Its Debt?
M5Z has built up its total debt levels in the last twelve months, from €46m to €81m , which accounts for long term debt. With this increase in debt, M5Z's cash and short-term investments stands at €37m , ready to be used for running the business. Its negative operating cash flow means calculating cash-to-debt wouldn't be useful. For this article’s sake, I won’t be looking at this today, but you can examine some of M5Z’s operating efficiency ratios such as ROA here.
Can M5Z meet its short-term obligations with the cash in hand?
With current liabilities at €199m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.16x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Semiconductor companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Can M5Z service its debt comfortably?
With debt reaching 54% of equity, M5Z may be thought of as relatively highly levered. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. However, since M5Z is presently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Although M5Z’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven't considered other factors such as how M5Z has been performing in the past. I suggest you continue to research Manz to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for M5Z’s future growth? Take a look at our free research report of analyst consensus for M5Z’s outlook.
- Valuation: What is M5Z 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 M5Z 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.
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