Investors are always looking for growth in small-cap stocks like Newater Technology Inc (NASDAQ:NEWA), with a market cap of $95.23M. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into NEWA here.
How does NEWA’s operating cash flow stack up against its debt?
Over the past year, NEWA has maintained its debt levels at around $3.6M , which is mainly comprised of near term debt. At this stable level of debt, NEWA’s cash and short-term investments stands at $1.5M for investing into the business. Though its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of NEWA’s operating efficiency ratios such as ROA here.
Does NEWA’s liquid assets cover its short-term commitments?
With current liabilities at $6.8M liabilities, it appears that the company has been able to meet these commitments with a current assets level of $14.2M, leading to a 2.08x current account ratio. For machinery 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 NEWA face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 33.42%, NEWA’s debt level may be seen as prudent. NEWA is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether NEWA is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interets and tax (EBIT) at least three times its net interest payments is considered financially sound. In NEWA’s, case, the ratio of 8.96x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as NEWA’s high interest coverage is seen as responsible and safe practice.
Next Steps:
Are you a shareholder? NEWA’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Given that its financial position may be different. I suggest keeping abreast of market expectations for NEWA’s future growth on our free analysis platform.