While small-cap stocks, such as NHS Industries Ltd. (CNSX:NHS) with its market cap of CA$1.3m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. 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. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, this is not a comprehensive overview, so I suggest you dig deeper yourself into NHS here.
NHS’s Debt (And Cash Flows)
Over the past year, NHS has maintained its debt levels at around CA$1.3m which accounts for long term debt. At this constant level of debt, NHS currently has CA$766k remaining in cash and short-term investments , ready to be used for running the business. Moreover, NHS has produced cash from operations of CA$187k in the last twelve months, leading to an operating cash to total debt ratio of 14%, signalling that NHS’s operating cash is less than its debt.
Does NHS’s liquid assets cover its short-term commitments?
Looking at NHS’s CA$783k in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of CA$1.2m, leading to a 1.59x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Real Estate companies, this is a reasonable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can NHS service its debt comfortably?
NHS is a highly-leveraged company with debt exceeding equity by over 100%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies.
Although NHS’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 NHS'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 NHS has been performing in the past. I suggest you continue to research NHS Industries to get a more holistic view of the small-cap by looking at:
- Valuation: What is NHS 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 NHS is currently mispriced by the market.
- Historical Performance: What has NHS'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.
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