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While small-cap stocks, such as NWF Group plc (LON:NWF) with its market cap of UK£79m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Oil and Gas companies, even ones that are profitable, 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. Though, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into NWF here.
How does NWF’s operating cash flow stack up against its debt?
NWF has shrunken its total debt levels in the last twelve months, from UK£17m to UK£16m , which includes long-term debt. With this reduction in debt, NWF currently has UK£1.0m remaining in cash and short-term investments , ready to deploy into the business. Moreover, NWF has generated UK£7.9m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 50%, indicating that NWF’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 NWF’s case, it is able to generate 0.5x cash from its debt capital.
Can NWF meet its short-term obligations with the cash in hand?
With current liabilities at UK£75m, the company has been able to meet these obligations given the level of current assets of UK£87m, with a current ratio of 1.16x. Usually, for Oil and Gas companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Does NWF face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 34%, NWF’s debt level may be seen as prudent. This range is considered safe as NWF is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether NWF 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 NWF’s, case, the ratio of 26x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as NWF’s high interest coverage is seen as responsible and safe practice.
NWF’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure NWF has company-specific issues impacting its capital structure decisions. You should continue to research NWF Group to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for NWF’s future growth? Take a look at our free research report of analyst consensus for NWF’s outlook.
- Valuation: What is NWF 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 NWF 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.
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 email@example.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.