Is nmcn plc’s (LON:NMCN) Balance Sheet Strong Enough To Weather A Storm?

nmcn plc (LON:NMCN) is a small-cap stock with a market capitalization of UK£70m. 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? Understanding the company’s financial health becomes crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We’ll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, this is just a partial view of the stock, and I recommend you dig deeper yourself into NMCN here.

NMCN’s Debt (And Cash Flows)

NMCN has shrunk its total debt levels in the last twelve months, from UK£5.0m to UK£4.5m , which is mainly comprised of near term debt. With this debt payback, NMCN currently has UK£19m remaining in cash and short-term investments , ready to be used for running the business. On top of this, NMCN has generated UK£18m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 404%, signalling that NMCN’s debt is appropriately covered by operating cash.

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

At the current liabilities level of UK£85m, it seems that the business may not be able to easily meet these obligations given the level of current assets of UK£83m, with a current ratio of 0.98x. The current ratio is calculated by dividing current assets by current liabilities.

LSE:NMCN Historical Debt, March 15th 2019
LSE:NMCN Historical Debt, March 15th 2019

Does NMCN face the risk of succumbing to its debt-load?

With debt at 31% of equity, NMCN may be thought of as appropriately levered. This range is considered safe as NMCN is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether NMCN 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 NMCN’s, case, the ratio of 17.54x suggests that interest is comfortably covered, which means that lenders may be willing to lend out more funding as NMCN’s high interest coverage is seen as responsible and safe practice.

Next Steps:

NMCN’s debt level is appropriate for a company its size. Furthermore, it is able to generate sufficient cash flow coverage, meaning it is able to put its debt in good use. However, 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 NMCN has been performing in the past. I recommend you continue to research nmcn to get a more holistic view of the stock by looking at:

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