While small-cap stocks, such as Nxt-ID Inc (NASDAQ:NXTD) with its market cap of US$34.3m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Software companies, in particular ones that run negative earnings, are more likely to be 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 does NXTD’s operating cash flow stack up against its debt?
Over the past year, NXTD has reduced its debt from US$17.1m to US$14.8m , which comprises of short- and long-term debt. With this reduction in debt, NXTD’s cash and short-term investments stands at US$1.3m 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 take a look at some of NXTD’s operating efficiency ratios such as ROA here.
Can NXTD meet its short-term obligations with the cash in hand?
At the current liabilities level of US$5.3m liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$7.8m, leading to a 1.46x current account ratio. Usually, for Software companies, this is a suitable ratio 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 74.2%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. However, since NXTD is currently loss-making, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
NXTD’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for NXTD’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Nxt-ID to get a better picture of the stock 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.
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.
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