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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$166.61M. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is vital, 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 suggest you dig deeper yourself into NZM here.
Does NZM generate enough cash through operations?
Over the past year, NZM has reduced its debt from NZ$126.42M to NZ$114.19M , which comprises of short- and long-term debt. With this reduction in debt, NZM’s cash and short-term investments stands at NZ$9.57M , ready to deploy into the business. Additionally, NZM has generated NZ$39.46M in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 34.55%, meaning that NZM’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In NZM’s case, it is able to generate 0.35x cash from its debt capital.
Does NZM’s liquid assets cover its short-term commitments?
With current liabilities at NZ$64.46M, it appears that the company has been able to meet these obligations given the level of current assets of NZ$66.82M, with a current ratio of 1.04x. For Media companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Can NZM service its debt comfortably?
With debt at 39.51% of equity, NZM may be thought of as appropriately levered. This range is considered safe as NZM is not taking on too much debt obligation, which may be constraining for future growth. 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 9.71x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving NZM ample headroom to grow its debt facilities.
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NZM has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. 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 NZM has been performing in the past. You should continue to research NZME to get a better picture of the stock by looking at: