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Are Neenah Inc’s (NYSE:NP) Interest Costs Too High?

While small-cap stocks, such as Neenah Inc (NYSE:NP) with its market cap of US$1.43B, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, since I only look at basic financial figures, I suggest you dig deeper yourself into NP here.

Does NP generate enough cash through operations?

NP’s debt level has been constant at around US$220.90M over the previous year – this includes both the current and long-term debt. At this current level of debt, NP’s cash and short-term investments stands at US$3.10M , ready to deploy into the business. On top of this, NP has generated US$115.80M in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 52.42%, signalling that NP’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In NP’s case, it is able to generate 0.52x cash from its debt capital.

Can NP meet its short-term obligations with the cash in hand?

At the current liabilities level of US$108.00M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$236.30M, with a current ratio of 2.19x. Usually, for Forestry companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.

NYSE:NP Historical Debt Feb 14th 18
NYSE:NP Historical Debt Feb 14th 18

Does NP face the risk of succumbing to its debt-load?

NP is a relatively highly levered company with a debt-to-equity of 56.16%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether NP is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In NP’s, case, the ratio of 8.93x 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:

NP’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around NP’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how NP has been performing in the past. I suggest you continue to research Neenah to get a better picture of the small-cap by looking at:


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.

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