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While small-cap stocks, such as NeoPhotonics Corporation (NYSE:NPTN) with its market cap of US$353m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Semiconductor industry, in particular ones that run negative earnings, are inclined towards being higher risk. So, understanding the company’s financial health becomes vital. I believe these basic checks tell most of the story you need to know. Though, I know these factors are very high-level, so I suggest you dig deeper yourself into NPTN here.
Does NPTN produce enough cash relative to debt?
NPTN’s debt levels have fallen from US$66m to US$57m over the last 12 months , which also accounts for long term debt. With this reduction in debt, the current cash and short-term investment levels stands at US$64m for investing into the business. On top of this, NPTN has generated US$17m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 31%, meaning that NPTN’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires positive earnings. In NPTN’s case, it is able to generate 0.31x cash from its debt capital.
Can NPTN pay its short-term liabilities?
With current liabilities at US$108m, the company has been able to meet these obligations given the level of current assets of US$220m, with a current ratio of 2.04x. Generally, for Semiconductor companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does NPTN face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 35%, NPTN’s debt level may be seen as prudent. NPTN is not taking on too much debt commitment, which may be constraining for future growth. Risk around debt is very low for NPTN, and the company also has the ability and headroom to increase debt if needed going forward.
Next Steps:
NPTN’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for NPTN’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research NeoPhotonics to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for NPTN’s future growth? Take a look at our free research report of analyst consensus for NPTN’s outlook.
- Valuation: What is NPTN 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 NPTN 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 editorial-team@simplywallst.com.