What You Must Know About Nexa Resources SA’s (NYSE:NEXA) Financial Strength
Investors are always looking for growth in small-cap stocks like Nexa Resources SA (NYSE:NEXA), with a market cap of US$1.7b. However, an important fact which most ignore is: how financially healthy is the business? 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. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, since I only look at basic financial figures, I recommend you dig deeper yourself into NEXA here.
Does NEXA produce enough cash relative to debt?
NEXA has sustained its debt level by about US$1.4b over the last 12 months which accounts for long term debt. At this current level of debt, NEXA currently has US$1.2b remaining in cash and short-term investments , ready to deploy into the business. Moreover, NEXA has generated cash from operations of US$427m in the last twelve months, resulting in an operating cash to total debt ratio of 30%, signalling that NEXA’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In NEXA’s case, it is able to generate 0.3x cash from its debt capital.
Can NEXA meet its short-term obligations with the cash in hand?
At the current liabilities level of US$715m, the company has been able to meet these obligations given the level of current assets of US$1.8b, with a current ratio of 2.55x. Usually, for Metals and Mining companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can NEXA service its debt comfortably?
With debt reaching 50% of equity, NEXA may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if NEXA’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 NEXA, the ratio of 5.86x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving NEXA ample headroom to grow its debt facilities.
Next Steps:
NEXA’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how NEXA has been performing in the past. I suggest you continue to research Nexa Resources to get a better picture of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for NEXA’s future growth? Take a look at our free research report of analyst consensus for NEXA’s outlook.
Historical Performance: What has NEXA’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.
To help readers see past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
