Natuzzi Sp.A. (NYSE:NTZ) is a small-cap stock with a market capitalization of US$92.76M. 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? Consumer Durables businesses operating in the environment facing headwinds from current disruption, in particular ones that run negative earnings, are inclined towards being higher risk. Assessing first and foremost the financial health is crucial. 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 suggest you dig deeper yourself into NTZ here.
Does NTZ generate enough cash through operations?
Over the past year, NTZ has ramped up its debt from €36.11M to €45.40M , which is made up of current and long term debt. With this increase in debt, the current cash and short-term investment levels stands at €55.00M for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of NTZ’s operating efficiency ratios such as ROA here.
Can NTZ meet its short-term obligations with the cash in hand?
At the current liabilities level of €147.70M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of €202.90M, with a current ratio of 1.37x. Generally, for Consumer Durables companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can NTZ service its debt comfortably?
With debt reaching 41.88% of equity, NTZ may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since NTZ is presently loss-making, 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.
At its current level of cash flow coverage, NTZ has room for improvement to better cushion for events which may require debt repayment. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure NTZ has company-specific issues impacting its capital structure decisions. I recommend you continue to research Natuzzi to get a better picture of the stock by looking at:
- 1. Valuation: What is NTZ 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 NTZ is currently mispriced by the market.
- 2. Historical Performance: What has NTZ’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.
- 3. 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 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.