Is Netcompany Group A/S (CPH:NETC) A Financially Sound Company?

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Investors are always looking for growth in small-cap stocks like Netcompany Group A/S (CPH:NETC), with a market cap of ø12b. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Software industry, even ones that are profitable, are more likely to be higher risk. So, understanding the company's financial health becomes vital. I believe these basic checks tell most of the story you need to know. Nevertheless, this commentary is still very high-level, so I recommend you dig deeper yourself into NETC here.

How does NETC’s operating cash flow stack up against its debt?

Over the past year, NETC has reduced its debt from ø1.3b to ø1.2b , which also accounts for long term debt. With this reduction in debt, NETC currently has ø108m remaining in cash and short-term investments for investing into the business. Additionally, NETC has produced ø186m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 16%, signalling that NETC’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In NETC’s case, it is able to generate 0.16x cash from its debt capital.

Does NETC’s liquid assets cover its short-term commitments?

With current liabilities at ø430m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.02x. Generally, for Software companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.

Can NETC service its debt comfortably?

With a debt-to-equity ratio of 66%, NETC 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. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In NETC's case, the ratio of 5.1x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

Although NETC’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I'm sure NETC has company-specific issues impacting its capital structure decisions. I recommend you continue to research Netcompany Group to get a more holistic view of the small-cap by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for NETC’s future growth? Take a look at our free research report of analyst consensus for NETC’s outlook.
2. Valuation: What is NETC 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 NETC 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.