Is FRoSTA Aktiengesellschaft’s (FRA:NLM) Balance Sheet Strong Enough To Weather A Storm?

FRoSTA Aktiengesellschaft (FRA:NLM) is a small-cap stock with a market capitalization of €433m. 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? Evaluating financial health as part of your investment thesis is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Let’s work through some financial health checks you may wish to consider if you’re interested in this stock. Nevertheless, potential investors would need to take a closer look, and I suggest you dig deeper yourself into NLM here.

Does NLM Produce Much Cash Relative To Its Debt?

NLM has sustained its debt level by about €42m over the last 12 months including long-term debt. At this constant level of debt, NLM’s cash and short-term investments stands at €16m , ready to be used for running the business. Additionally, NLM has generated cash from operations of €46m over the same time period, resulting in an operating cash to total debt ratio of 109%, meaning that NLM’s debt is appropriately covered by operating cash.

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

At the current liabilities level of €115m, it seems that the business has been able to meet these commitments with a current assets level of €183m, leading to a 1.59x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Food companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.

DB:NLM Historical Debt, March 12th 2019
DB:NLM Historical Debt, March 12th 2019

Is NLM’s debt level acceptable?

With debt at 26% of equity, NLM may be thought of as appropriately levered. NLM is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether NLM 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 NLM’s, case, the ratio of 134x suggests that interest is comfortably covered, which means that lenders may be willing to lend out more funding as NLM’s high interest coverage is seen as responsible and safe practice.

Next Steps:

NLM’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure NLM has company-specific issues impacting its capital structure decisions. I recommend you continue to research FRoSTA to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for NLM’s future growth? Take a look at our free research report of analyst consensus for NLM’s outlook.
  2. Valuation: What is NLM worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether NLM is currently mispriced by the market.
  3. 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.