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Investors are always looking for growth in small-cap stocks like NZME Limited (NZSE:NZM), with a market cap of NZ$120m. However, an important fact which most ignore is: how financially healthy is the business? 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. However, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into NZM here.
Does NZM produce enough cash relative to debt?
NZM has sustained its debt level by about NZ$132m over the last 12 months – this includes both the current and long-term debt. At this stable level of debt, NZM’s cash and short-term investments stands at NZ$13m for investing into the business. Additionally, NZM has produced cash from operations of NZ$35m in the last twelve months, resulting in an operating cash to total debt ratio of 27%, signalling that NZM’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In NZM’s case, it is able to generate 0.27x cash from its debt capital.
Can NZM meet its short-term obligations with the cash in hand?
Looking at NZM’s most recent NZ$50m liabilities, it appears that the company has been able to meet these obligations given the level of current assets of NZ$69m, with a current ratio of 1.39x. For Media companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can NZM service its debt comfortably?
NZM is a relatively highly levered company with a debt-to-equity of 47%. 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 NZM’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 NZM, the ratio of 8.64x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as NZM’s high interest coverage is seen as responsible and safe practice.
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NZM’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around NZM’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for NZM’s financial health. Other important fundamentals need to be considered alongside. You should continue to research NZME to get a more holistic view of the small-cap by looking at: