Investors are always looking for growth in small-cap stocks like Nordic Group Limited (SGX:MR7), with a market cap of S$157m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. However, this commentary is still very high-level, so I suggest you dig deeper yourself into MR7 here.

How does MR7’s operating cash flow stack up against its debt?

Over the past year, MR7 has ramped up its debt from S$33m to S$40m , which includes long-term debt. With this increase in debt, MR7’s cash and short-term investments stands at S$36m , ready to deploy into the business. Additionally, MR7 has generated S$7.8m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 19%, signalling that MR7’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In MR7’s case, it is able to generate 0.19x cash from its debt capital.

Does MR7’s liquid assets cover its short-term commitments?

Looking at MR7’s S$56m in current liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.65x. For Construction companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Does MR7 face the risk of succumbing to its debt-load?

MR7 is a relatively highly levered company with a debt-to-equity of 50%. 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 MR7’s case, the ratio of 13.23x suggests that interest is comfortably 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:

MR7’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how MR7 has been performing in the past. I recommend you continue to research Nordic Group to get a more holistic view of the small-cap by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for MR7’s future growth? Take a look at our free research report of analyst consensus for MR7’s outlook.

2. Historical Performance: What has MR7’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.

3. 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.