Are EnPro Industries Inc's (NYSE:NPO) Interest Costs Too High?

While small-cap stocks, such as EnPro Industries Inc (NYSE:NPO) with its market cap of US$1.52b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. However, this commentary is still very high-level, so I suggest you dig deeper yourself into NPO here.

How much cash does NPO generate through its operations?

NPO has shrunken its total debt levels in the last twelve months, from US$835.10m to US$488.00m – this includes both the current and long-term debt. With this debt payback, the current cash and short-term investment levels stands at US$93.40m , ready to deploy into the business. Additionally, NPO has generated US$128.20m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 26.27%, indicating that NPO’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In NPO’s case, it is able to generate 0.26x cash from its debt capital.

Can NPO pay its short-term liabilities?

Looking at NPO’s most recent US$256.80m liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$678.40m, with a current ratio of 2.64x. For Machinery companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Can NPO service its debt comfortably?

With a debt-to-equity ratio of 56.44%, NPO can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In NPO's case, the ratio of 3.61x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as NPO’s high interest coverage is seen as responsible and safe practice.

Next Steps:

NPO’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. Since there is also no concerns around NPO's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure NPO has company-specific issues impacting its capital structure decisions. I recommend you continue to research EnPro Industries to get a more holistic view of the small-cap by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for NPO’s future growth? Take a look at our free research report of analyst consensus for NPO’s outlook.
2. Valuation: What is NPO 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 NPO is currently mispriced by the market.
3. 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.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.