While small-cap stocks, such as Netshoes (Cayman) Limited (NYSE:NETS) with its market cap of US$68m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that NETS is not presently profitable, it’s essential to evaluate the current state of its operations and pathway to profitability. We’ll look at some basic checks that can form a snapshot the company’s financial strength. However, potential investors would need to take a closer look, and I suggest you dig deeper yourself into NETS here.
Does NETS Produce Much Cash Relative To Its Debt?
NETS has shrunk its total debt levels in the last twelve months, from R$332m to R$307m , which also accounts for long term debt. With this reduction in debt, NETS currently has R$51m remaining in cash and short-term investments , ready to be used for running the business. We note it produced negative cash flow over the last twelve months. For this article’s sake, I won’t be looking at this today, but you can examine some of NETS’s operating efficiency ratios such as ROA here.
Can NETS pay its short-term liabilities?
Looking at NETS’s R$549m in current liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.18x. The current ratio is the number you get when you divide current assets by current liabilities. For Online Retail companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Does NETS face the risk of succumbing to its debt-load?
NETS is a highly-leveraged company with debt exceeding equity by over 100%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. However, since NETS is presently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Although NETS’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure NETS has company-specific issues impacting its capital structure decisions. I suggest you continue to research Netshoes (Cayman) to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for NETS’s future growth? Take a look at our free research report of analyst consensus for NETS’s outlook.
- Historical Performance: What has NETS’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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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