While small-cap stocks, such as National Express Group PLC (LON:NEX) with its market cap of UK£2.0b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company’s balance sheet strength. However, this is just a partial view of the stock, and I suggest you dig deeper yourself into NEX here.
NEX’s Debt (And Cash Flows)
NEX has shrunk its total debt levels in the last twelve months, from UK£1.2b to UK£1.1b , which includes long-term debt. With this reduction in debt, NEX currently has UK£121m remaining in cash and short-term investments , ready to be used for running the business. Additionally, NEX has generated UK£307m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 27%, meaning that NEX’s current level of operating cash is high enough to cover debt.
Does NEX’s liquid assets cover its short-term commitments?
Looking at NEX’s UK£1.0b in current liabilities, the company may not have an easy time meeting these commitments with a current assets level of UK£585m, leading to a current ratio of 0.57x. The current ratio is the number you get when you divide current assets by current liabilities.
Does NEX face the risk of succumbing to its debt-load?
NEX is a relatively highly levered company with a debt-to-equity of 95%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if NEX’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 NEX, the ratio of 5.07x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving NEX ample headroom to grow its debt facilities.
Although NEX’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. However, its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for NEX’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research National Express Group to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for NEX’s future growth? Take a look at our free research report of analyst consensus for NEX’s outlook.
- Valuation: What is NEX 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 NEX 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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