Investors are always looking for growth in small-cap stocks like NFON AG (FRA:NFN), with a market cap of €196.02m. However, an important fact which most ignore is: how financially healthy is the business? Telecom businesses operating in the environment facing headwinds from current disruption, in particular ones that run negative earnings, are inclined towards being higher risk. So, understanding the company’s financial health becomes essential. Here are few basic financial health checks you should consider before taking the plunge. However, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into NFN here.
How does NFN’s operating cash flow stack up against its debt?
Over the past year, NFN has ramped up its debt from €1.54m to €2.57m . With this increase in debt, NFN currently has €2.18m remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of NFN’s operating efficiency ratios such as ROA here.
Can NFN meet its short-term obligations with the cash in hand?
With current liabilities at €8.67m, it seems that the business is not able to meet these obligations given the level of current assets of €8.00m, with a current ratio of 0.92x below the prudent level of 3x.
Does NFN face the risk of succumbing to its debt-load?NFN is a highly-leveraged company with debt exceeding equity by over 100%. 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, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
NFN’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I’m sure NFN has company-specific issues impacting its capital structure decisions. I suggest you continue to research NFON to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for NFN’s future growth? Take a look at our free research report of analyst consensus for NFN’s outlook.
- Valuation: What is NFN 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 NFN is currently mispriced by the market.
- 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.