Is MLS Innovation Inc's (ATH:MLS) Balance Sheet A Threat To Its Future? - Simply Wall St

MLS Innovation Inc (ATSE:MLS) is a small-cap stock with a market capitalization of €51.00M. 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? Software companies, even ones that are profitable, are more likely to be higher risk. Assessing first and foremost the financial health is crucial. I believe these basic checks tell most of the story you need to know. Though, I know these factors are very high-level, so I recommend you dig deeper yourself into MLS here.

How does MLS's operating cash flow stack up against its debt?

MLS has built up its total debt levels in the last twelve months, from €4.78M to €10.54M , which is made up of current and long term debt. With this growth in debt, the current cash and short-term investment levels stands at €9.57M , ready to deploy into the business. Moreover, MLS has generated cash from operations of €5.88M during the same period of time, leading to an operating cash to total debt ratio of 55.79%, indicating that MLS's debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In MLS's case, it is able to generate 0.56x cash from its debt capital.

Can MLS meet its short-term obligations with the cash in hand?

At the current liabilities level of €11.37M liabilities, the company has been able to meet these commitments with a current assets level of €25.26M, leading to a 2.22x current account ratio. For Software companies, this ratio is within a sensible range since there's sufficient cash cushion without leaving too much capital idle or in low-earning investments.

ATSE:MLS Historical Debt Mar 31st 18

Does MLS face the risk of succumbing to its debt-load?

With a debt-to-equity ratio of 41.93%, MLS can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether MLS 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 MLS's, case, the ratio of 2.41x 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:

Although MLS'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. This is only a rough assessment of financial health, and I'm sure MLS has company-specific issues impacting its capital structure decisions. You should continue to research MLS Innovation to get a more holistic view of the small-cap by looking at:

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