Investors are always looking for growth in small-cap stocks like NuStar GP Holdings LLC (NYSE:NSH), with a market cap of $775.28M. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Oil and Gas industry, even ones that are profitable, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is crucial. Here are few basic financial health checks you should consider before taking the plunge. However, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into NSH here.
Does NSH generate an acceptable amount of cash through operations?
NSH has built up its total debt levels in the last twelve months, from $26.0M to $30.0M made up of predominantly near term debt. With this increase in debt, NSH’s cash and short-term investments stands at $0.2M for investing into the business. Moreover, NSH has produced cash from operations of $49.8M during the same period of time, resulting in an operating cash to total debt ratio of 165.84%, indicating that NSH’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In NSH’s case, it is able to generate 1.66x cash from its debt capital.
Can NSH pay its short-term liabilities?
With current liabilities at $30.8M, the company is not able to meet these obligations given the level of current assets of $0.8M, with a current ratio of 0.03x below the prudent level of 3x.
Is NSH’s debt level acceptable?
With a debt-to-equity ratio of 16.56%, NSH’s debt level may be seen as prudent. NSH is not taking on too much debt commitment, which may be constraining for future growth. We can test if NSH’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 NSH, the ratio of 31.59x 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:
NSH’s high cash coverage and conservative debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. But it is still important for shareholders to understand why the company isn’t increasing its cheaper cost of capital to fund future growth, especially if meeting short-term obligations could also bring about issues. This is only a rough assessment of financial health, and I’m sure NSH has company-specific issues impacting its capital structure decisions. I recommend you continue to research NuStar GP Holdings to get a more holistic view of the stock by looking at: