Investors are always looking for growth in small-cap stocks like Nordic American Offshore Ltd (NYSE:NAO), with a market cap of $75.62M. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Energy Services industry, in particular ones that run negative earnings, are inclined towards being higher risk. Assessing first and foremost the financial health is essential. Here are few basic financial health checks you should consider before taking the plunge. Though, I know these factors are very high-level, so I suggest you dig deeper yourself into NAO here.

How does NAO’s operating cash flow stack up against its debt?

NAO’s debt levels surged from $45.8M to $136.2M over the last 12 months , which is made up of current and long term debt. With this growth in debt, the current cash and short-term investment levels stands at $3.0M , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, 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 NAO’s operating efficiency ratios such as ROA here.

Does NAO’s liquid assets cover its short-term commitments?

Looking at NAO’s most recent $4.1M liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.93x. Usually, for Energy Services companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Does NAO face the risk of succumbing to its debt-load?

With debt reaching 52.92% of equity, NAO may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since NAO is presently unprofitable, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.

Next Steps:

NAO’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how NAO has been performing in the past. I recommend you continue to research Nordic American Offshore to get a better picture of the stock by looking at: