While small-cap stocks, such as Nxt-ID Inc (NASDAQ:NXTD) with its market cap of USD $20.86M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Why is it important? A major downturn in the energy industry has resulted in over 150 companies going bankrupt and has put more than 100 on the verge of a collapse, primarily due to excessive debt. Thus, it becomes utmost important for an investor to test a company’s resilience for such contingencies. In simple terms, I believe these three small calculations tell most of the story you need to know. Check out our latest analysis for Nxt-ID
Does NXTD generate enough cash through operations?
While failure to manage cash has been one of the major reasons behind the demise of a lot of small businesses, mismanagement comes into the light during tough situations such as an economic recession. These catastrophes does not mean the company can stop servicing its debt obligations. Fortunately, we can test the company’s capacity to pay back its debtholders without summoning any catastrophes by looking at how much cash it generates from its current operations. Last year, NXTD’s operating cash flow was 0.03x its current debt. This means what NXTD can generate on an annual basis only covers less than a tenth of what it actually owes its debtors in the near term, which raises a red flag.
Does NXTD’s liquid assets cover its short-term commitments?
What about its commitments to other stakeholders such as payments to suppliers and employees? During times of unfavourable events, NXTD could be required to liquidate some of its assets to meet these upcoming payments, as cash flow from operations is hindered. We should examine if the company’s cash and short-term investment levels match its current liabilities. Our analysis shows that NXTD is unable to meet all of its upcoming commitments with its cash and other short-term assets. While this is not abnormal for companies, as their cash is better invested in the business or returned to investors than lying around, it does bring about some concerns should any unfavourable circumstances arise.
Is NXTD’s level of debt at an acceptable level?
While ideally the debt-to equity ratio of a financially healthy company should be less than 40%, several factors such as industry life-cycle and economic conditions can result in a company raising a significant amount of debt. For NXTD, the debt-to-equity ratio stands at above 100%, which indicates that the company is holding a high level of debt relative to its net worth. In the event of financial turmoil, the company may experience difficulty meeting interest and other debt obligations. While debt-to-equity ratio has several factors at play, an easier way to check whether NXTD’s leverage is at a sustainable level is to check its ability to service the debt. A company generating earnings at least three times its interest payments is considered financially sound. NXTD’s interest on debt is not strongly covered by earnings as it sits at around 0.01x. Debtors may be less inclined to loan the company more money, giving NXTD less headroom for growth through debt.
Are you a shareholder? NXTD’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. In addition to this, the company may not be able to pay all of its upcoming liabilities from its current short-term assets. Going forward, its financial position may change. I recommend keeping abreast of market expectations for NXTD’s future growth on our free analysis platform.
Are you a potential investor? NXTD’s large debt ratio on top of poor cash coverage in addition to low liquidity coverage of near-term expenses may not be what you’re after in an investment. However, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of NXTD’s track record. I encourage you to continue your research by taking a look at NXTD’s past performance analysis on our free platform in order to determine for yourself whether its debt position is justified.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.