Norman Broadbent Plc (LON:NBB) is a small-cap stock with a market capitalization of UK£6.5m. 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? Given that NBB is not presently profitable, it’s essential to evaluate the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Though, I know these factors are very high-level, so I recommend you dig deeper yourself into NBB here.
How does NBB’s operating cash flow stack up against its debt?
NBB’s debt levels surged from UK£833k to UK£1.2m over the last 12 months , which is mainly comprised of near term debt. With this rise in debt, the current cash and short-term investment levels stands at UK£260k , ready to deploy 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 NBB’s operating efficiency ratios such as ROA here.
Does NBB’s liquid assets cover its short-term commitments?
With current liabilities at UK£2.9m, the company may not be able to easily meet these obligations given the level of current assets of UK£2.9m, with a current ratio of 0.99x.
Can NBB service its debt comfortably?
With a debt-to-equity ratio of 68%, NBB 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. However, since NBB 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.
Next Steps:
NBB’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Though 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 NBB has company-specific issues impacting its capital structure decisions. You should continue to research Norman Broadbent to get a more holistic view of the stock by looking at:
- Historical Performance: What has NBB’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.
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 editorial-team@simplywallst.com.