While small-cap stocks, such as Hoftex Group AG (MUN:NBH) with its market cap of €76.2m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, since I only look at basic financial figures, I suggest you dig deeper yourself into NBH here.
Does NBH produce enough cash relative to debt?
NBH has sustained its debt level by about €59.0m over the last 12 months comprising of short- and long-term debt. At this current level of debt, the current cash and short-term investment levels stands at €13.6m , ready to deploy into the business. On top of this, NBH has produced cash from operations of €16.3m in the last twelve months, resulting in an operating cash to total debt ratio of 27.6%, signalling that NBH’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In NBH’s case, it is able to generate 0.28x cash from its debt capital.
Does NBH’s liquid assets cover its short-term commitments?
Looking at NBH’s most recent €18.6m liabilities, it seems that the business has been able to meet these obligations given the level of current assets of €84.3m, with a current ratio of 4.52x. Though, anything about 3x may be excessive, since NBH may be leaving too much capital in low-earning investments.
Does NBH face the risk of succumbing to its debt-load?With a debt-to-equity ratio of 60.2%, NBH 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 test if NBH’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For NBH, the ratio of 6.04x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as NBH’s high interest coverage is seen as responsible and safe practice.
NBH’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. Since there is also no concerns around NBH’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure NBH has company-specific issues impacting its capital structure decisions. You should continue to research Hoftex Group to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for NBH’s future growth? Take a look at our free research report of analyst consensus for NBH’s outlook.
- Historical Performance: What has NBH’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 email@example.com.