Natuzzi SpA (NYSE:NTZ) is a small-cap stock with a market capitalization of US$81.1m. 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. Evaluating financial health as part of your investment thesis is essential. Here are few basic financial health checks you should consider before taking the plunge. However, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into NTZ here.
How much cash does NTZ generate through its operations?
NTZ’s debt levels surged from €42.1m to €45.1m over the last 12 months , which comprises of short- and long-term debt. With this increase in debt, NTZ’s cash and short-term investments stands at €36.1m for investing into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, 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 assess some of NTZ’s operating efficiency ratios such as ROA here.
Can NTZ meet its short-term obligations with the cash in hand?
Looking at NTZ’s most recent €187.5m liabilities, the company has been able to meet these obligations given the level of current assets of €191.1m, with a current ratio of 1.02x. Generally, for Consumer Durables companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Does NTZ face the risk of succumbing to its debt-load?
NTZ is a relatively highly levered company with a debt-to-equity of 46.6%. 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 currently unprofitable, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
NTZ’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. 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:
- 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.
- 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.
- 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 email@example.com.