While small-cap stocks, such as Nomad Foods Limited (NYSE:NOMD) with its market cap of US$4.1b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Understanding the company's financial health becomes crucial, as mismanagement of capital can lead to 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. However, potential investors would need to take a closer look, and I suggest you dig deeper yourself into NOMD here.
NOMD’s Debt (And Cash Flows)
NOMD has built up its total debt levels in the last twelve months, from €1.5b to €1.8b – this includes long-term debt. With this increase in debt, NOMD's cash and short-term investments stands at €328m , ready to be used for running the business. Moreover, NOMD has produced €321m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 18%, meaning that NOMD’s operating cash is less than its debt.
Can NOMD pay its short-term liabilities?
At the current liabilities level of €840m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.12x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Food companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does NOMD face the risk of succumbing to its debt-load?
With debt reaching 87% of equity, NOMD may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In NOMD's case, the ratio of 5.97x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving NOMD ample headroom to grow its debt facilities.
NOMD’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 NOMD'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 NOMD has company-specific issues impacting its capital structure decisions. I recommend you continue to research Nomad Foods to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for NOMD’s future growth? Take a look at our free research report of analyst consensus for NOMD’s outlook.
- Valuation: What is NOMD 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 NOMD 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.
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