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Neenah, Inc. (NYSE:NP) is a small-cap stock with a market capitalization of US$1.0b. 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? Assessing first and foremost the financial health is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, this is not a comprehensive overview, so I’d encourage you to dig deeper yourself into NP here.
NP’s Debt (And Cash Flows)
Over the past year, NP has maintained its debt levels at around US$263m including long-term debt. At this current level of debt, the current cash and short-term investment levels stands at US$7.6m to keep the business going. On top of this, NP has generated cash from operations of US$88m in the last twelve months, leading to an operating cash to total debt ratio of 33%, indicating that NP’s operating cash is sufficient to cover its debt.
Can NP meet its short-term obligations with the cash in hand?
Looking at NP’s US$115m in current liabilities, the company has been able to meet these commitments with a current assets level of US$286m, leading to a 2.49x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. For Forestry 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 NP face the risk of succumbing to its debt-load?
NP is a relatively highly levered company with a debt-to-equity of 67%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if NP’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 NP, the ratio of 6.02x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as NP’s high interest coverage is seen as responsible and safe practice.
Although NP’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 NP's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how NP has been performing in the past. I recommend you continue to research Neenah to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for NP’s future growth? Take a look at our free research report of analyst consensus for NP’s outlook.
- Valuation: What is NP 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 NP 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 firstname.lastname@example.org. 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.