QEX Logistics Limited (NZSE:QEX) is a small-cap stock with a market capitalization of NZ$53m. 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? Assessing first and foremost the financial health is crucial, since poor capital management may bring about 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, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into QEX here.
How much cash does QEX generate through its operations?
Over the past year, QEX has ramped up its debt from NZ$727k to NZ$2.3m made up of predominantly near term debt. With this rise in debt, QEX’s cash and short-term investments stands at NZ$1.8m , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can take a look at some of QEX’s operating efficiency ratios such as ROA here.
Can QEX pay its short-term liabilities?
With current liabilities at NZ$6.1m, it seems that the business has been able to meet these obligations given the level of current assets of NZ$12m, with a current ratio of 1.94x. For Logistics companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is QEX’s debt level acceptable?
With debt at 37% of equity, QEX may be thought of as appropriately levered. This range is considered safe as QEX is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether QEX 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 QEX’s, case, the ratio of 16.45x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving QEX ample headroom to grow its debt facilities.
Next Steps:
QEX has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure QEX has company-specific issues impacting its capital structure decisions. You should continue to research QEX Logistics to get a better picture of the stock by looking at: