Is Neenah Inc’s (NYSE:NP) Balance Sheet Strong Enough To Weather A Storm?
Neenah Inc (NYSE:NP) is a small-cap stock with a market capitalization of US$1.1b. 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? Assessing first and foremost the financial health is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, since I only look at basic financial figures, I suggest you dig deeper yourself into NP here.
How does NP’s operating cash flow stack up against its debt?
NP’s debt levels surged from US$223m to US$250m over the last 12 months – this includes long-term debt. With this increase in debt, NP currently has US$7.4m remaining in cash and short-term investments , ready to deploy into the business. Additionally, NP has produced cash from operations of US$82m in the last twelve months, leading to an operating cash to total debt ratio of 33%, meaning that NP’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 NP’s case, it is able to generate 0.33x cash from its debt capital.
Can NP meet its short-term obligations with the cash in hand?
With current liabilities at US$132m, the company has been able to meet these obligations given the level of current assets of US$297m, with a current ratio of 2.24x. For Forestry companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can NP service its debt comfortably?
With a debt-to-equity ratio of 63%, NP can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In NP’s case, the ratio of 7.05x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving NP ample headroom to grow its debt facilities.
Next Steps:
Although NP’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for NP’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Neenah to get a more holistic view of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for NP’s future growth? Take a look at our free research report of analyst consensus for NP’s outlook.
Valuation: What is NP 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 NP is currently mispriced by the market.
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.
