Investors are always looking for growth in small-cap stocks like NRW Holdings Limited (ASX:NWH), with a market cap of AU$630.05M. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into NWH here.

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

Over the past year, NWH has reduced its debt from AU$96.49M to AU$63.10M , which comprises of short- and long-term debt. With this debt repayment, the current cash and short-term investment levels stands at AU$42.26M , ready to deploy into the business. Moreover, NWH has generated cash from operations of AU$47.06M during the same period of time, leading to an operating cash to total debt ratio of 74.58%, indicating that NWH’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In NWH’s case, it is able to generate 0.75x cash from its debt capital.

Can NWH meet its short-term obligations with the cash in hand?

At the current liabilities level of AU$83.21M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of AU$116.10M, with a current ratio of 1.4x. Usually, for Construction companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.

Is NWH’s debt level acceptable?

With a debt-to-equity ratio of 42.01%, NWH can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In NWH’s case, the ratio of 5.95x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

NWH’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 NWH’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how NWH has been performing in the past. I suggest you continue to research NRW Holdings to get a more holistic view of the small-cap by looking at: