MTI Wireless Edge Ltd (LON:MWE), with a market capitalization of USD $17 Million, is considered a small-cap company. Although such businesses are the ones which could grow the most, they are also highly prone to a downturn in the country’s economy or even a specific region. It’s low debt-to-equity ratio of 12.7% does make it look financially sound, but we must also check how its cash flows and earnings stand against its debt.
Primarily due to the lack of diversification in revenues geographically, often investors opt for a bundle of small-caps. On the other hand, well-versed investors allocate a small part of their portfolio capital to individual small-caps, primarily to improve its risk-return profile. However, that doesn’t reduce the risks these companies face individually. But I believe that it can be reduced to some extent by looking at these back of the hand balance sheet calculations.
How M.T.I Wireless Edge’s liquid assets stack up against its debt?
Despite low debt, for M.T.I Wireless Edge to continue operations during a downturn, it needs a sound liquidity position. When evaluating financial strength, I compare a company’s current assets (cash and liquid assets) to its total debt. MWE’s current assets ($19 Million) easily cover the total debt ($2 Million), giving it enough control on its balance sheet to survive a downturn.
