The New Zealand Refining Company Limited (NZSE:NZR) is a small-cap stock with a market capitalization of NZ$734m. 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? Companies operating in the Oil and Gas industry, even ones that are profitable, tend to be high risk. So, understanding the company’s financial health becomes essential. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into NZR here.
How does NZR’s operating cash flow stack up against its debt?
NZR has built up its total debt levels in the last twelve months, from NZ$218m to NZ$275m – this includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at NZ$6.8m , ready to deploy into the business. Additionally, NZR has generated cash from operations of NZ$154m during the same period of time, leading to an operating cash to total debt ratio of 56%, indicating that NZR’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 NZR’s case, it is able to generate 0.56x cash from its debt capital.
Does NZR’s liquid assets cover its short-term commitments?
Looking at NZR’s NZ$203m in current liabilities, it seems that the business may not have an easy time meeting these commitments with a current assets level of NZ$120m, leading to a current ratio of 0.59x.
Does NZR face the risk of succumbing to its debt-load?
NZR’s level of debt is appropriate relative to its total equity, at 37%. NZR is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether NZR 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 NZR’s, case, the ratio of 5.3x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as NZR’s high interest coverage is seen as responsible and safe practice.
Next Steps:
NZR’s debt level is appropriate for a company its size. Furthermore, it is able to generate sufficient cash flow coverage, meaning it is able to put its debt in good use. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for NZR’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research New Zealand Refining to get a better picture of the stock by looking at: