Yahoo Finance NCC Group plc (LON:NCC): Time For A Financial Health Check
Want to help shape the future of investing tools? Participate in a short research study and receive a subscription valued at $60.
NCC Group plc (LON:NCC) is a small-cap stock with a market capitalization of UK£357m. 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? Companies operating in the IT industry, even ones that are profitable, are more likely to be higher risk. Assessing first and foremost the financial health is vital. I believe these basic checks tell most of the story you need to know. However, I know these factors are very high-level, so I suggest you dig deeper yourself into NCC here.
Does NCC produce enough cash relative to debt?
NCC has sustained its debt level by about UK£61m over the last 12 months which accounts for long term debt. At this stable level of debt, NCC’s cash and short-term investments stands at UK£16m , ready to deploy into the business. On top of this, NCC has produced UK£25m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 41%, signalling that NCC’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In NCC’s case, it is able to generate 0.41x cash from its debt capital.
Can NCC meet its short-term obligations with the cash in hand?
Looking at NCC’s UK£72m in current liabilities, the company has been able to meet these obligations given the level of current assets of UK£90m, with a current ratio of 1.25x. Usually, for IT companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does NCC face the risk of succumbing to its debt-load?
NCC’s level of debt is appropriate relative to its total equity, at 29%. NCC is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether NCC is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In NCC’s, case, the ratio of 12.82x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as NCC’s high interest coverage is seen as responsible and safe practice.
Next Steps:
NCC’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for NCC’s financial health. Other important fundamentals need to be considered alongside. You should continue to research NCC Group to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for NCC’s future growth? Take a look at our free research report of analyst consensus for NCC’s outlook.
Valuation: What is NCC 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 NCC 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 editorial-team@simplywallst.com.
