Investors are always looking for growth in small-cap stocks like Newag S.A. (WSE:NWG), with a market cap of zł725m. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let’s work through some financial health checks you may wish to consider if you’re interested in this stock. However, potential investors would need to take a closer look, and I suggest you dig deeper yourself into NWG here.
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Does NWG Produce Much Cash Relative To Its Debt?
Over the past year, NWG has ramped up its debt from zł310m to zł390m , which includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at zł64m to keep the business going. On top of this, NWG has produced cash from operations of zł18m over the same time period, leading to an operating cash to total debt ratio of 4.5%, signalling that NWG’s debt is not covered by operating cash.
Can NWG pay its short-term liabilities?
With current liabilities at zł495m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.47x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Machinery companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is NWG’s debt level acceptable?
With a debt-to-equity ratio of 79%, NWG can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether NWG 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 NWG’s, case, the ratio of 14x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Although NWG’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around NWG’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for NWG’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Newag to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for NWG’s future growth? Take a look at our free research report of analyst consensus for NWG’s outlook.
- Valuation: What is NWG 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 NWG 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.