Noble Corporation plc (NYSE:NE) is a small-cap stock with a market capitalization of US$1.2b. 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? Companies operating in the Energy Services industry, in particular ones that run negative earnings, are more likely to be higher risk. So, understanding the company’s financial health becomes crucial. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, this commentary is still very high-level, so I suggest you dig deeper yourself into NE here.
Does NE produce enough cash relative to debt?
NE’s debt level has been constant at around US$3.8b over the previous year – this includes both the current and long-term debt. At this current level of debt, the current cash and short-term investment levels stands at US$411m , ready to deploy into the business. On top of this, NE has generated cash from operations of US$254m in the last twelve months, resulting in an operating cash to total debt ratio of 6.6%, meaning that NE’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency for unprofitable companies since metrics such as return on asset (ROA) requires positive earnings. In NE’s case, it is able to generate 0.066x cash from its debt capital.
Can NE meet its short-term obligations with the cash in hand?
Looking at NE’s most recent US$337m liabilities, the company has been able to meet these obligations given the level of current assets of US$697m, with a current ratio of 2.07x. Usually, for Energy Services companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Is NE’s debt level acceptable?
With a debt-to-equity ratio of 81%, NE can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since NE 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.
NE’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. Though, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure NE has company-specific issues impacting its capital structure decisions. You should continue to research Noble to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for NE’s future growth? Take a look at our free research report of analyst consensus for NE’s outlook.
- Valuation: What is NE 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 NE is currently mispriced by the market.
- 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.
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