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Investors are always looking for growth in small-cap stocks like National Express Group PLC (LON:NEX), with a market cap of UK£2.0b. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is vital, 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, this is not a comprehensive overview, so I’d encourage you to dig deeper yourself into NEX here.
NEX’s Debt (And Cash Flows)
NEX's debt levels have fallen from UK£1.2b to UK£1.1b over the last 12 months – this includes long-term debt. With this reduction in debt, NEX's cash and short-term investments stands at UK£121m , ready to be used for running the business. On top of this, NEX has generated UK£307m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 27%, signalling that NEX’s operating cash is sufficient to cover its debt.
Can NEX pay its short-term liabilities?
With current liabilities at UK£1.0b, it appears that the company may not have an easy time meeting these commitments with a current assets level of UK£585m, leading to a current ratio of 0.57x. The current ratio is calculated by dividing current assets by current liabilities.
Can NEX service its debt comfortably?
With a debt-to-equity ratio of 95%, NEX can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if NEX’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 NEX, the ratio of 5.07x 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.
Although NEX’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for NEX's financial health. Other important fundamentals need to be considered alongside. You should continue to research National Express Group to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for NEX’s future growth? Take a look at our free research report of analyst consensus for NEX’s outlook.
- Valuation: What is NEX 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 NEX 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 email@example.com. 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.