National Tyre & Wheel Limited (ASX:NTD) is a small-cap stock with a market capitalization of A$128.41M. 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? Evaluating financial health as part of your investment thesis is essential, 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, since I only look at basic financial figures, I recommend you dig deeper yourself into NTD here.

Does NTD generate enough cash through operations?

NTD has built up its total debt levels in the last twelve months, from A$6.9M to A$8.2M – this includes both the current and long-term debt. With this rise in debt, NTD’s cash and short-term investments stands at A$14.8M , ready to deploy into the business. Additionally, NTD has generated cash from operations of A$6.5M over the same time period, resulting in an operating cash to total debt ratio of 79.80%, signalling that NTD’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In NTD’s case, it is able to generate 0.8x cash from its debt capital.

Can NTD pay its short-term liabilities?

With current liabilities at A$29.7M, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.23x. For Retail Distributors companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

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

With a debt-to-equity ratio of 19.63%, NTD’s debt level may be seen as prudent. This range is considered safe as NTD is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if NTD’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 NTD, the ratio of 29.51x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as NTD’s high interest coverage is seen as responsible and safe practice.

Next Steps:

NTD’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how NTD has been performing in the past. I recommend you continue to research National Tyre & Wheel to get a better picture of the stock by looking at: