Is Mexco Energy Corporation (NYSEMKT:MXC) A Financially Sound Company?

Investors are always looking for growth in small-cap stocks like Mexco Energy Corporation (AMEX:MXC), with a market cap of US$7.44M. However, an important fact which most ignore is: how financially healthy is the business? Oil and Gas companies, in particular ones that run negative earnings, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into MXC here.

Does MXC generate an acceptable amount of cash through operations?

MXC’s debt levels have fallen from US$5.58M to US$2.90M over the last 12 months , which is made up of current and long term debt. With this debt repayment, MXC’s cash and short-term investments stands at US$73.45K for investing into the business. Moreover, MXC has generated cash from operations of US$312.08K over the same time period, leading to an operating cash to total debt ratio of 10.76%, meaning that MXC’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency for unprofitable companies as traditional metrics such as return on asset (ROA) requires a positive net income. In MXC’s case, it is able to generate 0.11x cash from its debt capital.

Can MXC pay its short-term liabilities?

With current liabilities at US$137.26K, the company has been able to meet these commitments with a current assets level of US$504.93K, leading to a 3.68x current account ratio. However, a ratio greater than 3x may be considered as too high, as MXC could be holding too much capital in a low-return investment environment.

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Is MXC’s debt level acceptable?

With debt at 11.68% of equity, MXC may be thought of as appropriately levered. This range is considered safe as MXC is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. Investors’ risk associated with debt is very low with MXC, and the company has plenty of headroom and ability to raise debt should it need to in the future.

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MXC’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how MXC has been performing in the past. You should continue to research Mexco Energy to get a more holistic view of the stock by looking at:

• 1. Historical Performance: What has MXC’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
• 2. 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 pass 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.