What Investors Should Know About NeoPhotonics Corporation's (NYSE:NPTN) Financial Strength
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Investors are always looking for growth in small-cap stocks like NeoPhotonics Corporation (NYSE:NPTN), with a market cap of US$201m. However, an important fact which most ignore is: how financially healthy is the business? Given that NPTN is not presently profitable, it’s crucial to understand the current state of its operations and pathway to profitability. We'll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, these checks don't give you a full picture, so I’d encourage you to dig deeper yourself into NPTN here.
Does NPTN Produce Much Cash Relative To Its Debt?
NPTN has shrunk its total debt levels in the last twelve months, from US$86m to US$76m , which includes long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at US$70m , ready to be used for running the business. Moreover, NPTN has generated US$32m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 42%, signalling that NPTN’s current level of operating cash is high enough to cover debt.
Does NPTN’s liquid assets cover its short-term commitments?
With current liabilities at US$113m, the company has been able to meet these obligations given the level of current assets of US$225m, with a current ratio of 1.98x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Semiconductor companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is NPTN’s debt level acceptable?
With a debt-to-equity ratio of 50%, NPTN can be considered as an above-average leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. Though, since NPTN is presently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
Although NPTN’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 NPTN's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for NPTN's financial health. Other important fundamentals need to be considered alongside. You should continue to research NeoPhotonics to get a more holistic view of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for NPTN’s future growth? Take a look at our free research report of analyst consensus for NPTN’s outlook.
Valuation: What is NPTN worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether NPTN is currently mispriced by the market.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
