Nova Re SIIQ S.p.A. (BIT:NR): Time For A Financial Health Check

Simply Wall St

Fri, Jun 7, 2019, 1:57 AM

While small-cap stocks, such as Nova Re SIIQ S.p.A. (BIT:NR) with its market cap of €44m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, this is not a comprehensive overview, so I’d encourage you to dig deeper yourself into NR here.

NR’s Debt (And Cash Flows)

NR has shrunk its total debt levels in the last twelve months, from €83m to €63m – this includes long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at €17m , ready to be used for running the business. Additionally, NR has produced €2.4m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 3.8%, indicating that NR’s current level of operating cash is not high enough to cover debt.

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

With current liabilities at €5.2m, it appears that the company has been able to meet these obligations given the level of current assets of €21m, with a current ratio of 3.93x. The current ratio is the number you get when you divide current assets by current liabilities. However, a ratio greater than 3x may be considered by some to be quite high, however this is not necessarily a negative for the company.

Is NR’s debt level acceptable?

NR is a relatively highly levered company with a debt-to-equity of 94%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can test if NR’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 NR, the ratio of 0.62x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.

Next Steps:

NR’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 NR's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for NR's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Nova Re SIIQ to get a better picture of the small-cap by looking at: