Are Nordic American Offshore Ltd’s (NAO) Interest Costs Too High?
Investors are always looking for growth in small-cap stocks like Nordic American Offshore Ltd (NYSE:NAO), with a market cap of USD $78.29M. However, an important fact which most ignore is: how financially healthy is the company? There are always disruptions which destabilize an existing industry, in which most small-cap companies are the first casualties. These factors make a basic understanding of a company’s financial position of utmost importance for a potential investor. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Check out our latest analysis for Nordic American Offshore
Does NAO generate enough cash through operations?
There are many headwinds that come unannounced, such as natural disasters and political turmoil, which can challenge a small business and its ability to adapt and recover. These adverse events bring devastation and yet does not absolve the company from its debt. Can NAO pay off what it owes to its debtholder by using only cash from its operational activities? Last year, NAO’s operating cash flow was -0.13x its current debt. This means what NAO can generate on an annual basis, which is currently a negative value, does not cover what it actually owes its debtors in the near term. This raises a red flag, looking at NAO’s operations at this point in time.
Does NAO’s liquid assets cover its short-term commitments?
What about its other commitments such as payments to suppliers and salaries to its employees? As cash flow from operation is hindered by adverse events, NAO may need to liquidate its short-term assets to meet these upcoming payments. We test for NAO’s ability to meet these needs by comparing its cash and short-term investments with current liabilities. Our analysis shows that NAO does have enough liquid assets on hand to meet its upcoming liabilities, which lowers our concerns should adverse events arise.
Does NAO face the risk of succumbing to its debt-load?
While ideally the debt-to equity ratio of a financially healthy company should be less than 40%, several factors such as industry life-cycle and economic conditions can result in a company raising a significant amount of debt. In the case of NAO, the debt-to-equity ratio is 51.48%, which indicates that its debt can cause trouble for the company in a downturn but it is still at a manageable level.
Next Steps:
Are you a shareholder? NAO’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 will be able to pay all of its upcoming liabilities from its current short-term assets. Given that NAO’s financial situation may change. You should always be keeping abreast of market expectations for NAO’s future growth on our free analysis platform.
Are you a potential investor? Though short-term liquidity isn’t an issue, NAO’s high debt levels on top of poor cash coverage may not build the strongest investment case. But, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of NAO’s track record. You should continue your analysis by taking a look at NAO’s past performance analysis on our free platform in order to determine for yourself whether its debt position is justified.
To help readers see pass 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.
