While small-cap stocks, such as Nanotech Security Corp (TSXV:NTS) with its market cap of USD $59 Million, are popular for their explosive growth, investors should also pay heed to their balance sheet to judge whether the company can survive a downturn. There are always disruptions which destabilize and many a times end an existing industry, and most small-cap companies are the first casualties when such a wave hits. <\/p>\n
When a company is faced with an extreme event undercutting its profits or disrupting its operations temporarily, its the companys ability to meet short-term obligations which allows it to remain in the business. These factors make a basic understanding of a companys financial position of utmost importance for a new investor. Here are a few basic checks that are good enough to have a broad overview of the companys financial strength. See our latest analysis for NTS <\/p>\n
More than the revenue shown on paper, what matters is how much cash is generated through operations and whether it is enough to continue operations, meet debt-obligations and fund growth. Over the past year, Nanotech Securitys operating cash flows stood at -57.1% of its overall debt. Nanotech Security currently has to rely on external funding to even run its business. This can be ok for a fast-growing company, but otherwise this is of course a sign of some serious debt-problems. <\/p>\n
Nanotech Security (TSXV:NTS) Historical Debt May 29th 17 <\/p>\n
This is to test Nanotech Securitys liquidity, which it may need due to a plethora of reasons that can derail the normal functioning of an organization in the short-term. It can be anything from natural calamity, political unrest, economic collapse, labor-strike, supply-chain disruption, or even a major factory breakdown, which can disrupt its normal functioning. For a small company, that could be a death blow if it doesnt have enough reserves to meet its short-term obligations payments to suppliers, wages, short-term bank loans, interest on long-term debt. Nanotech Security short term (1 year) commitments are greater than its holdings of cash and other short term assets. <\/p>\n
Nanotech Security (TSXV:NTS) Net Worth May 29th 17 <\/p>\n
While ideally I reckon the debt-to equity ratio of a financially healthy company to be less than 40%, several factors such as industry life-cycle and economic conditions can result in a company raising a significant amount of debt. For Nanotech Security, the debt to equity ratio is 45.2% and this indicates that Nanotech Securitys debt is at an acceptable level. A more empirical and universal test is to measure the interest payments against earnings of a company. In an ideal situation, earnings should cover interest by at least a 5x multiple; thus, reducing any concerns related to high volatility in net income due to small fluctuations in operating performance. In NTSs case the company is making a loss, therefore interest on debt is not well covered by earnings. <\/p>\n
With a high level of debt on its balance sheet, Nanotech Security could still be in a financially strong position if its operating cash flows and earnings stack up. In this case, Nanotech Securitys cash flows and earnings tell a different story. It needs to do a lot of work on its profitability and operational efficiency to be designated as a financially sound company. <\/p>\n
Now when you know whether you should keep the debt in mind as a risk factor when putting together your investment thesis, I recommend you check out our latest free analysis report on Nanotech Security to see what are NTSs growth prospects and whether it could be considered an undervalued opportunity. <\/p>\n
PS. If you are not interested in Nanotech Security anymore, you can use our free platform to see my list of over 150 other stocks with a high growth potential. <\/p>\n
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Is Nanotech Security Corp's (TSXV:NTS) Balance Sheet A Threat To ... - Simply Wall St<\/a><\/p>\n","protected":false},"excerpt":{"rendered":" While small-cap stocks, such as Nanotech Security Corp (TSXV:NTS) with its market cap of USD $59 Million, are popular for their explosive growth, investors should also pay heed to their balance sheet to judge whether the company can survive a downturn. Continue reading