Yahoo Finance Northgate plc (LON:NTG): Time For A Financial Health Check
While small-cap stocks, such as Northgate plc (LON:NTG) with its market cap of UK£550.40m, 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 vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into NTG here.
How much cash does NTG generate through its operations?
NTG’s debt level has been constant at around UK£353.73m over the previous year comprising of short- and long-term debt. At this constant level of debt, the current cash and short-term investment levels stands at UK£41.17m , ready to deploy into the business. On top of this, NTG has generated UK£47.82m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 13.52%, meaning that NTG’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In NTG’s case, it is able to generate 0.14x cash from its debt capital.
Does NTG’s liquid assets cover its short-term commitments?
With current liabilities at UK£116.07m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.19x. Usually, for Transportation companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can NTG service its debt comfortably?
With a debt-to-equity ratio of 85.09%, NTG can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if NTG’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 NTG, the ratio of 7.62x 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.
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 proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for NTG’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Northgate to get a better picture 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.
