While small-cap stocks, such as Northwest Natural Gas Company (NYSE:NWN) with its market cap of US$1.86b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that NWN is not presently profitable, it’s vital to understand the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into NWN here.
How much cash does NWN generate through its operations?
NWN has built up its total debt levels in the last twelve months, from US$719.71m to US$808.28m – this includes both the current and long-term debt. With this increase in debt, NWN currently has US$11.22m remaining in cash and short-term investments for investing into the business. On top of this, NWN has generated cash from operations of US$166.06m in the last twelve months, leading to an operating cash to total debt ratio of 20.54%, indicating that NWN’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for loss making companies since metrics such as return on asset (ROA) requires positive earnings. In NWN’s case, it is able to generate 0.21x cash from its debt capital.
Can NWN meet its short-term obligations with the cash in hand?
At the current liabilities level of US$316.85m liabilities, the company has not been able to meet these commitments with a current assets level of US$241.69m, leading to a 0.76x current account ratio. which is under the appropriate industry ratio of 3x.
Can NWN service its debt comfortably?
NWN is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since NWN 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.
NWN’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven’t considered other factors such as how NWN has been performing in the past. I recommend you continue to research Northwest Natural Gas to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for NWN’s future growth? Take a look at our free research report of analyst consensus for NWN’s outlook.
- Valuation: What is NWN 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 NWN 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.
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 email@example.com.