Investors are always looking for growth in small-cap stocks like Nasstar plc (LON:NASA), with a market cap of UK£67m. However, an important fact which most ignore is: how financially healthy is the business? IT companies, especially ones that are currently loss-making, tend to be high risk. So, understanding the company’s financial health becomes vital. Here are few basic financial health checks you should consider before taking the plunge. However, I know these factors are very high-level, so I recommend you dig deeper yourself into NASA here.
Does NASA produce enough cash relative to debt?
NASA has sustained its debt level by about UK£4.5m over the last 12 months including long-term debt. At this constant level of debt, NASA currently has UK£4.3m remaining in cash and short-term investments for investing into the business. Moreover, NASA has produced UK£5.1m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 115%, indicating that NASA’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for loss making businesses as traditional metrics such as return on asset (ROA) requires positive earnings. In NASA’s case, it is able to generate 1.15x cash from its debt capital.
Does NASA’s liquid assets cover its short-term commitments?
At the current liabilities level of UK£9.0m, it seems that the business may not be able to easily meet these obligations given the level of current assets of UK£8.7m, with a current ratio of 0.96x.
Is NASA’s debt level acceptable?
NASA’s level of debt is appropriate relative to its total equity, at 18%. NASA is not taking on too much debt commitment, which may be constraining for future growth. Investors’ risk associated with debt is very low with NASA, and the company has plenty of headroom and ability to raise debt should it need to in the future.
NASA has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. But it is still important for shareholders to understand why the company isn’t increasing its cheaper cost of capital to fund future growth, especially if meeting short-term obligations could also bring about issues. I admit this is a fairly basic analysis for NASA’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Nasstar to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for NASA’s future growth? Take a look at our free research report of analyst consensus for NASA’s outlook.
- Valuation: What is NASA 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 NASA 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.
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