Nexa Resources S.A. (NYSE:NEXA) is a small-cap stock with a market capitalization of US$1.6b. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Evaluating financial health as part of your investment thesis is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, since I only look at basic financial figures, I suggest you dig deeper yourself into NEXA here.
How much cash does NEXA generate through its operations?
NEXA has sustained its debt level by about US$1.4b over the last 12 months including long-term debt. At this constant level of debt, NEXA currently has US$1.2b remaining in cash and short-term investments , ready to deploy into the business. Additionally, NEXA has generated US$427m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 30%, meaning that NEXA’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In NEXA’s case, it is able to generate 0.3x cash from its debt capital.
Does NEXA’s liquid assets cover its short-term commitments?
With current liabilities at US$715m, it appears that the company has been able to meet these commitments with a current assets level of US$1.8b, leading to a 2.55x current account ratio. Usually, for Metals and Mining companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Does NEXA face the risk of succumbing to its debt-load?
NEXA is a relatively highly levered company with a debt-to-equity of 50%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. 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 NEXA’s case, the ratio of 5.86x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving NEXA ample headroom to grow its debt facilities.
NEXA’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 NEXA’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 NEXA has company-specific issues impacting its capital structure decisions. You should continue to research Nexa Resources to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for NEXA’s future growth? Take a look at our free research report of analyst consensus for NEXA’s outlook.
- Valuation: What is NEXA 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 NEXA 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.
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 email@example.com.