Nxt-ID, Inc. (NASDAQ:NXTD) is a small-cap stock with a market capitalization of US$26m. 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? Software companies, especially ones that are currently loss-making, are inclined towards being higher risk. Assessing first and foremost the financial health is essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into NXTD here.
How much cash does NXTD generate through its operations?
NXTD’s debt levels have fallen from US$17m to US$15m over the last 12 months , which also accounts for long term debt. With this debt repayment, NXTD currently has US$780k remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can examine some of NXTD’s operating efficiency ratios such as ROA here.
Does NXTD’s liquid assets cover its short-term commitments?
With current liabilities at US$7.0m, it appears that the company has been able to meet these commitments with a current assets level of US$8.2m, leading to a 1.16x current account ratio. For Software companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does NXTD face the risk of succumbing to its debt-load?
NXTD is a relatively highly levered company with a debt-to-equity of 76%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since NXTD is presently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Although NXTD’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around NXTD’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure NXTD has company-specific issues impacting its capital structure decisions. I recommend you continue to research Nxt-ID to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for NXTD’s future growth? Take a look at our free research report of analyst consensus for NXTD’s outlook.
- Historical Performance: What has NXTD’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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