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While small-cap stocks, such as Novanta Inc. (NASDAQ:NOVT) with its market cap of US$3.0b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, these checks don't give you a full picture, so I suggest you dig deeper yourself into NOVT here.
Does NOVT Produce Much Cash Relative To Its Debt?
NOVT has shrunk its total debt levels in the last twelve months, from US$235m to US$207m – this includes long-term debt. With this debt repayment, the current cash and short-term investment levels stands at US$82m , ready to be used for running the business. Moreover, NOVT has produced US$90m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 43%, signalling that NOVT’s current level of operating cash is high enough to cover debt.
Does NOVT’s liquid assets cover its short-term commitments?
At the current liabilities level of US$104m, it seems that the business has been able to meet these obligations given the level of current assets of US$282m, with a current ratio of 2.7x. The current ratio is calculated by dividing current assets by current liabilities. For Electronic companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.
Can NOVT service its debt comfortably?
With a debt-to-equity ratio of 56%, NOVT can be considered as an above-average leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can test if NOVT’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For NOVT, the ratio of 8.05x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
NOVT’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven't considered other factors such as how NOVT has been performing in the past. You should continue to research Novanta to get a more holistic view of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for NOVT’s future growth? Take a look at our free research report of analyst consensus for NOVT’s outlook.
Valuation: What is NOVT 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 NOVT 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.