Yahoo Finance Does NFI Group Inc’s (TSE:NFI) Debt Level Pose A Problem?
Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as NFI Group Inc (TSE:NFI), with a market capitalization of CA$2.9b, rarely draw their attention from the investing community. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. Let’s take a look at NFI’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into NFI here.
See our latest analysis for NFI Group
Does NFI produce enough cash relative to debt?
NFI’s debt levels surged from US$490m to US$637m over the last 12 months , which is made up of current and long term debt. With this rise in debt, the current cash and short-term investment levels stands at US$16m , ready to deploy into the business. Additionally, NFI has generated US$90m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 14%, meaning that NFI’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In NFI’s case, it is able to generate 0.14x cash from its debt capital.
Does NFI’s liquid assets cover its short-term commitments?
With current liabilities at US$421m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2x. Generally, for Machinery companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Is NFI’s debt level acceptable?
With debt reaching 78% of equity, NFI may be thought of as relatively highly levered. This is not uncommon for a mid-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 NFI’s case, the ratio of 14.24x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as NFI’s high interest coverage is seen as responsible and safe practice.
Next Steps:
NFI’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure NFI has company-specific issues impacting its capital structure decisions. I suggest you continue to research NFI Group to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for NFI’s future growth? Take a look at our free research report of analyst consensus for NFI’s outlook.
Valuation: What is NFI 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 NFI is currently mispriced by the market.
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.
