Investors are always looking for growth in small-cap stocks like Northwest Natural Holding Company (NYSE:NWN), with a market cap of US$2.0b. However, an important fact which most ignore is: how financially healthy is the business? Given that NWN is not presently profitable, it’s vital to understand the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Though, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into NWN here.
Does NWN produce enough cash relative to debt?
Over the past year, NWN has ramped up its debt from US$720m to US$806m – this includes both the current and long-term debt. With this increase in debt, the current cash and short-term investment levels stands at US$9m for investing into the business. On top of this, NWN has generated US$175m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 22%, indicating that NWN’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency for unprofitable businesses since metrics such as return on asset (ROA) requires a positive net income. In NWN’s case, it is able to generate 0.22x cash from its debt capital.
Does NWN’s liquid assets cover its short-term commitments?
At the current liabilities level of US$298m liabilities, the company may not have an easy time meeting these commitments with a current assets level of US$181m, leading to a current ratio of 0.61x.
Can NWN service its debt comfortably?
Since total debt levels have outpaced equities, NWN is a highly 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 NWN is presently unprofitable, 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.
With a high level of debt on its balance sheet, NWN could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for NWN to increase its operational efficiency. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented 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 Holding to get a better picture 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.
- Historical Performance: What has NWN’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.
- 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.