While small-cap stocks, such as Nanogate AG (ETR:N7G) with its market cap of €143m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes vital, since poor capital management may bring about 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, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into N7G here.
Does N7G produce enough cash relative to debt?
N7G has built up its total debt levels in the last twelve months, from €68m to €120m , which accounts for long term debt. With this rise in debt, N7G’s cash and short-term investments stands at €44m , ready to deploy into the business. Additionally, N7G has generated cash from operations of €12m during the same period of time, leading to an operating cash to total debt ratio of 9.7%, signalling that N7G’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In N7G’s case, it is able to generate 0.097x cash from its debt capital.
Can N7G meet its short-term obligations with the cash in hand?
Looking at N7G’s €66m 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 1.76x. For Chemicals 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 N7G face the risk of succumbing to its debt-load?
With total debt exceeding equities, N7G is considered a highly levered company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if N7G’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For N7G, the ratio of 2.06x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as N7G’s low interest coverage already puts the company at higher risk of default.
Next Steps:
Although N7G’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. Since there is also no concerns around N7G’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for N7G’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Nanogate to get a better picture of the small-cap by looking at: