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Are Next Fifteen Communications Group plc’s (LON:NFC) Interest Costs Too High?

Next Fifteen Communications Group plc (LON:NFC) is a small-cap stock with a market capitalization of UK£416m. 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? So, understanding the company’s financial health becomes crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, I know these factors are very high-level, so I suggest you dig deeper yourself into NFC here.

How does NFC’s operating cash flow stack up against its debt?

NFC has built up its total debt levels in the last twelve months, from UK£37m to UK£47m , which is made up of current and long term debt. With this growth in debt, the current cash and short-term investment levels stands at UK£22m , ready to deploy into the business. On top of this, NFC has produced UK£28m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 60%, signalling that NFC’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 NFC’s case, it is able to generate 0.6x cash from its debt capital.

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

Looking at NFC’s most recent UK£69m liabilities, the company has been able to meet these obligations given the level of current assets of UK£87m, with a current ratio of 1.26x. For Media companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.

AIM:NFC Historical Debt October 3rd 18
AIM:NFC Historical Debt October 3rd 18

Is NFC’s debt level acceptable?

With debt reaching 55% of equity, NFC may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether NFC 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 NFC’s, case, the ratio of 37.89x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as NFC’s high interest coverage is seen as responsible and safe practice.

Next Steps:

Although NFC’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. Since there is also no concerns around NFC’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 NFC has company-specific issues impacting its capital structure decisions. I suggest you continue to research Next Fifteen Communications Group to get a more holistic view of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for NFC’s future growth? Take a look at our free research report of analyst consensus for NFC’s outlook.

  2. Valuation: What is NFC 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 NFC is currently mispriced by the market.

  3. 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.

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