Is Nanotech Security Corp’s (TSXV:NTS) Balance Sheet A Threat To … – Simply Wall St

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.

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

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.

Nanotech Security (TSXV:NTS) Historical Debt May 29th 17

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.

Nanotech Security (TSXV:NTS) Net Worth May 29th 17

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.

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.

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.

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.

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Is Nanotech Security Corp's (TSXV:NTS) Balance Sheet A Threat To ... - Simply Wall St