Nautilus Marine Services PLC (AIM:NAUT) is a small-cap stock with a market capitalization of GBP £3.43M. 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. The significance of doing due diligence on a company’s financial strength stems from the fact that over 20,000 companies go bankrupt in every quarter in the US alone. These factors make a basic understanding of a company’s financial position of utmost importance for a potential investor. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. See our latest analysis for NAUT
Does NAUT generate an acceptable amount of cash through operations?
Unxpected adverse events, such as natural disasters and wars, can be a true test of a company’s capacity to meet its obligations. These adverse events bring devastation and yet does not absolve the company from its debt. Can NAUT pay off what it owes to its debtholder by using only cash from its operational activities? Last year, NAUT’s operating cash flow was -0.68x its current debt. This means what NAUT can generate on an annual basis, which is currently a negative value, does not cover what it actually owes its debtors in the near term. This raises a red flag, looking at NAUT’s operations at this point in time.
Can NAUT pay its short-term liabilities?
What about its commitments to other stakeholders such as payments to suppliers and employees? As cash flow from operation is hindered by adverse events, NAUT may need to liquidate its short-term assets to meet these upcoming payments. We should examine if the company’s cash and short-term investment levels match its current liabilities. Our analysis shows that NAUT does have enough liquid assets on hand to meet its upcoming liabilities, which lowers our concerns should adverse events arise.
Does NAUT face the risk of succumbing to its debt-load?
While ideally the debt-to equity ratio of a financially healthy company should be less than 40%, several factors such as industry life-cycle and economic conditions can result in a company raising a significant amount of debt. In the case of NAUT, the debt-to-equity ratio is 73.82%, which indicates that its debt can cause trouble for the company in a downturn but it is still at a manageable level.
Are you a shareholder? NAUT’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. Given that NAUT’s financial situation may change. I suggest keeping abreast of market expectations for NAUT’s future growth on our free analysis platform.
Are you a potential investor? Although short-term liquidity isn’t a concern, NAUT’s high debt levels along with poor cash coverage may not be what you’re after in an investment. But, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of NAUT’s track record. As a following step, you should take a look at NAUT’s past performance analysis on our free platform in order to determine for yourself whether its debt position is justified.
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.