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Is Nordic American Offshore Ltd’s (NYSE:NAO) Balance Sheet A Threat To Its Future?

Nordic American Offshore Ltd (NYSE:NAO) is a small-cap stock with a market capitalization of US$58.89m. 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? Energy Services companies, especially ones that are currently loss-making, tend to be high risk. Assessing first and foremost the financial health is essential. I believe these basic checks tell most of the story you need to know. Though, since I only look at basic financial figures, I recommend you dig deeper yourself into NAO here.

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

Over the past year, NAO has maintained its debt levels at around US$136.64m – this includes both the current and long-term debt. At this stable level of debt, NAO currently has US$23.30m remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can assess some of NAO’s operating efficiency ratios such as ROA here.

Can NAO pay its short-term liabilities?

Looking at NAO’s most recent US$2.64m liabilities, the company has been able to meet these commitments with a current assets level of US$30.04m, leading to a 11.39x current account ratio. However, anything above 3x is considered high and could mean that NAO has too much idle capital in low-earning investments.

NYSE:NAO Historical Debt August 10th 18
NYSE:NAO Historical Debt August 10th 18

Can NAO service its debt comfortably?

With a debt-to-equity ratio of 57.52%, NAO can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. However, since NAO is currently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.

Next Steps:

At its current level of cash flow coverage, NAO has room for improvement to better cushion for events which may require debt repayment. However, 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 NAO has company-specific issues impacting its capital structure decisions. I recommend you continue to research Nordic American Offshore to get a more holistic view of the stock by looking at:

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

  2. Historical Performance: What has NAO’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.

  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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