Investors are always looking for growth in small-cap stocks like NFON AG (DB:NFN), with a market cap of €178.42M. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Telecom industry facing headwinds from current disruption, in particular ones that run negative earnings, are more likely to be higher risk. Assessing first and foremost the financial health is essential. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, I know these factors are very high-level, so I recommend you dig deeper yourself into NFN here.
How does NFN’s operating cash flow stack up against its debt?
NFN’s debt levels surged from €1.54M to €2.57M over the last 12 months , which is mainly comprised of near term debt. With this growth in debt, the current cash and short-term investment levels stands at €2.18M for investing into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of NFN’s operating efficiency ratios such as ROA here.
Can NFN pay its short-term liabilities?
Looking at NFN’s most recent €8.67M liabilities, it appears that the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.92x, which is below the prudent industry ratio of 3x.
Does NFN face the risk of succumbing to its debt-load?Since total debt levels have outpaced equities, NFN is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since NFN is currently loss-making, 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.
With a high level of debt on its balance sheet, NFN could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for NFN to increase its operational efficiency. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven’t considered other factors such as how NFN has been performing in the past. I recommend you continue to research NFON to get a better picture of the stock by looking at:
- Historical Performance: What has NFN’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.