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NORMA Group SE (FRA:NOEJ) is a small-cap stock with a market capitalization of €1.4b. 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 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, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into NOEJ here.
Does NOEJ produce enough cash relative to debt?
Over the past year, NOEJ has ramped up its debt from €554m to €607m , which comprises of short- and long-term debt. With this rise in debt, NOEJ currently has €216m remaining in cash and short-term investments for investing into the business. Moreover, NOEJ has produced €131m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 22%, signalling that NOEJ’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 NOEJ’s case, it is able to generate 0.22x cash from its debt capital.
Does NOEJ’s liquid assets cover its short-term commitments?
Looking at NOEJ’s most recent €229m liabilities, it appears that the company has been able to meet these obligations given the level of current assets of €597m, with a current ratio of 2.6x. Usually, for Machinery companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Does NOEJ face the risk of succumbing to its debt-load?
Since total debt levels have outpaced equities, NOEJ is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether NOEJ 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 NOEJ’s, case, the ratio of 10.72x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as NOEJ’s high interest coverage is seen as responsible and safe practice.
Next Steps:
NOEJ’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. 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 NOEJ has been performing in the past. I recommend you continue to research NORMA Group to get a more holistic view of the stock by looking at: