Yahoo Finance Is Northgate plc (LON:NTG) A Financially Sound Company?
Investors are always looking for growth in small-cap stocks like Northgate plc (LON:NTG), with a market cap of UK£547.23m. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into NTG here.
How does NTG’s operating cash flow stack up against its debt?
Over the past year, NTG has maintained its debt levels at around UK£353.73m – this includes both the current and long-term debt. At this constant level of debt, NTG’s cash and short-term investments stands at UK£41.17m , ready to deploy into the business. Moreover, NTG has produced UK£47.82m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 13.52%, signalling that NTG’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In NTG’s case, it is able to generate 0.14x cash from its debt capital.
Can NTG meet its short-term obligations with the cash in hand?
Looking at NTG’s most recent UK£116.07m liabilities, it seems that the business has been able to meet these obligations given the level of current assets of UK£137.70m, with a current ratio of 1.19x. Usually, for Transportation 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.
Can NTG service its debt comfortably?
NTG is a relatively highly levered company with a debt-to-equity of 85.09%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In NTG’s case, the ratio of 7.62x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as NTG’s high interest coverage is seen as responsible and safe practice.
Next Steps:
NTG’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure NTG has company-specific issues impacting its capital structure decisions. You should continue to research Northgate to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for NTG’s future growth? Take a look at our free research report of analyst consensus for NTG’s outlook.
Historical Performance: What has NTG’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 pass 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.
