While small-cap stocks, such as Netshoes (Cayman) Limited (NYSE:NETS) with its market cap of R$93.79m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Online Retail businesses operating in the environment facing headwinds from current disruption, especially ones that are currently loss-making, are inclined towards being higher risk. So, understanding the company’s financial health becomes essential. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, I know these factors are very high-level, so I suggest you dig deeper yourself into NETS here.
Does NETS produce enough cash relative to debt?
Over the past year, NETS has reduced its debt from R$494.53m to R$318.92m , which is made up of current and long term debt. With this debt repayment, NETS’s cash and short-term investments stands at R$60.65m , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of NETS’s operating efficiency ratios such as ROA here.
Does NETS’s liquid assets cover its short-term commitments?
Looking at NETS’s most recent R$588.79m liabilities, it appears that the company has been able to meet these obligations given the level of current assets of R$802.72m, with a current ratio of 1.36x. Generally, for Online Retail companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Does NETS face the risk of succumbing to its debt-load?
NETS is a relatively highly levered company with a debt-to-equity of 75.41%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since NETS is currently unprofitable, 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.
NETS’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. Keep in mind I haven’t considered other factors such as how NETS has been performing in the past. I recommend you continue to research Netshoes (Cayman) to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for NETS’s future growth? Take a look at our free research report of analyst consensus for NETS’s outlook.
- Historical Performance: What has NETS’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 firstname.lastname@example.org.