Nordex SE (ETR:NDX1) is a small-cap stock with a market capitalization of €798m. 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? Since NDX1 is loss-making right now, it’s vital to understand the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Though, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into NDX1 here.
Does NDX1 produce enough cash relative to debt?
NDX1’s debt level has been constant at around €651m over the previous year – this includes both the current and long-term debt. At this constant level of debt, the current cash and short-term investment levels stands at €499m for investing into the business. Additionally, NDX1 has generated cash from operations of €159m over the same time period, leading to an operating cash to total debt ratio of 24%, meaning that NDX1’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency for unprofitable businesses since metrics such as return on asset (ROA) requires a positive net income. In NDX1’s case, it is able to generate 0.24x cash from its debt capital.
Does NDX1’s liquid assets cover its short-term commitments?
With current liabilities at €1.6b, the company has been able to meet these commitments with a current assets level of €1.9b, leading to a 1.23x current account ratio. Usually, for Electrical companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is NDX1’s debt level acceptable?
With debt reaching 87% of equity, NDX1 may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since NDX1 is presently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
At its current level of cash flow coverage, NDX1 has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure NDX1 has company-specific issues impacting its capital structure decisions. I suggest you continue to research Nordex to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for NDX1’s future growth? Take a look at our free research report of analyst consensus for NDX1’s outlook.
- Historical Performance: What has NDX1’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.
- 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 past 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. For errors that warrant correction please contact the editor at firstname.lastname@example.org.