How Financially Strong Is Mitchells & Butlers plc (LON:MAB)?
Mitchells & Butlers plc (LON:MAB) is a small-cap stock with a market capitalization of UK£1.0b. 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? Assessing first and foremost the financial health is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. 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 suggest you dig deeper yourself into MAB here.
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Does MAB Produce Much Cash Relative To Its Debt?
MAB's debt levels have fallen from UK£2.4b to UK£2.2b over the last 12 months , which includes long-term debt. With this debt repayment, the current cash and short-term investment levels stands at UK£242m to keep the business going. On top of this, MAB has generated cash from operations of UK£240m during the same period of time, leading to an operating cash to total debt ratio of 11%, indicating that MAB’s current level of operating cash is not high enough to cover debt.
Does MAB’s liquid assets cover its short-term commitments?
At the current liabilities level of UK£630m, it appears that the company may not have an easy time meeting these commitments with a current assets level of UK£328m, leading to a current ratio of 0.52x. The current ratio is calculated by dividing current assets by current liabilities.
Can MAB service its debt comfortably?
With total debt exceeding equity, MAB is considered a highly levered company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether MAB 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 MAB's, case, the ratio of 2.48x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
Next Steps:
MAB’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. However, its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I'm sure MAB has company-specific issues impacting its capital structure decisions. You should continue to research Mitchells & Butlers to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for MAB’s future growth? Take a look at our free research report of analyst consensus for MAB’s outlook.
Valuation: What is MAB 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 MAB 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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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.
