Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Newater Technology, Inc. (NASDAQ:NEWA) is a small-cap stock with a market capitalization of US$82m. 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, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, this is not a comprehensive overview, so I suggest you dig deeper yourself into NEWA here.
NEWA’s Debt (And Cash Flows)
NEWA has built up its total debt levels in the last twelve months, from US$9.0m to US$15m – this includes long-term debt. With this rise in debt, NEWA currently has US$2.5m remaining in cash and short-term investments , ready to be used for running the business. Moving on, operating cash flow was negative over the last twelve months. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of NEWA’s operating efficiency ratios such as ROA here.
Does NEWA’s liquid assets cover its short-term commitments?
Looking at NEWA’s US$30m in current liabilities, the company has been able to meet these commitments with a current assets level of US$40m, leading to a 1.31x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. For Machinery companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is NEWA’s debt level acceptable?
NEWA is a relatively highly levered company with a debt-to-equity of 57%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if NEWA’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For NEWA, the ratio of 14.04x suggests that interest is comfortably covered, which means that lenders may be willing to lend out more funding as NEWA’s high interest coverage is seen as responsible and safe practice.
NEWA’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 NEWA's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure NEWA has company-specific issues impacting its capital structure decisions. I suggest you continue to research Newater Technology to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for NEWA’s future growth? Take a look at our free research report of analyst consensus for NEWA’s outlook.
- Historical Performance: What has NEWA'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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.