Investors are always looking for growth in small-cap stocks like Neo Industrial Plc (HEL:NEO1V), with a market cap of €27.48m. However, an important fact which most ignore is: how financially healthy is the business? 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. I believe these basic checks tell most of the story you need to know. However, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into NEO1V here.
How much cash does NEO1V generate through its operations?
NEO1V has shrunken its total debt levels in the last twelve months, from €13.80m to €9.78m – this includes both the current and long-term debt. With this debt repayment, NEO1V currently has €1.83m remaining in cash and short-term investments , ready to deploy into the business. On top of this, NEO1V has produced cash from operations of €6.71m over the same time period, leading to an operating cash to total debt ratio of 68.62%, meaning that NEO1V’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In NEO1V’s case, it is able to generate 0.69x cash from its debt capital.
Does NEO1V’s liquid assets cover its short-term commitments?
Looking at NEO1V’s most recent €19.45m liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.11x. Generally, for Electrical companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Does NEO1V face the risk of succumbing to its debt-load?NEO1V is a relatively highly levered company with a debt-to-equity of 90.89%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if NEO1V’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 NEO1V, the ratio of 3.33x 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.
Although NEO1V’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. Keep in mind I haven’t considered other factors such as how NEO1V has been performing in the past. I recommend you continue to research Neo Industrial to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for NEO1V’s future growth? Take a look at our free research report of analyst consensus for NEO1V’s outlook.
- Valuation: What is NEO1V 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 NEO1V 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.
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 firstname.lastname@example.org.