Nera Telecommunications Ltd (SGX:N01) is a small-cap stock with a market capitalization of S$126.66M. 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? Communications companies, even ones that are profitable, are more likely to be higher risk. So, understanding the company’s financial health becomes essential. I believe these basic checks tell most of the story you need to know. Nevertheless, I know these factors are very high-level, so I suggest you dig deeper yourself into N01 here.
Does N01 generate an acceptable amount of cash through operations?
N01’s debt levels surged from S$9.59M to S$11.30M over the last 12 months , which is made up of current and long term debt. With this growth in debt, the current cash and short-term investment levels stands at S$20.57M for investing into the business. Additionally, N01 has produced cash from operations of S$2.31M during the same period of time, resulting in an operating cash to total debt ratio of 20.44%, meaning that N01’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In N01’s case, it is able to generate 0.2x cash from its debt capital.
Can N01 meet its short-term obligations with the cash in hand?
With current liabilities at S$87.05M, the company has been able to meet these obligations given the level of current assets of S$151.67M, with a current ratio of 1.74x. Generally, for Communications companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does N01 face the risk of succumbing to its debt-load?
With debt at 14.09% of equity, N01 may be thought of as appropriately levered. N01 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if N01’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 N01, the ratio of 161x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving N01 ample headroom to grow its debt facilities.
N01’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for N01’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Nera Telecommunications to get a more holistic view of the stock by looking at:
- Valuation: What is N01 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 N01 is currently mispriced by the market.
- Historical Performance: What has N01’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.