NXTanalytic’s Pandemic Impact Research attempts to translate our belief that we are not returning to “normal” and that a “new normal” will exist creating opportunities for some companies, and challenges and failure for others.
Our research process includes the analysis of 7 factors and 30 specific indications we believe will impact companies during and after the Covid-19 pandemic. We also review and score a series of financial ratios and stress tests designed to provide a snapshot of a company’s financial health and ability to survive a prolonged period of reduced growth, and/or finance growth or restructuring to take advantage of new opportunities.
Pandemic Impact Factor Screening is based on the thesis that consumer and business behaviour and practices will be changed significantly as a result of the pandemic and its aftermath. We have developed a group of seven major factors and over 30 related qualifying screening questions that we believe indicate whether a company has an increased risk or reward profile.
Scoring and Rating for Factor Exposure
We objectively score businesses based on positive and negative factors and how significantly they may be affected by each applicable factor. Our model generates a total regression score by generating a coefficient of the risk and reward scores given to the company by an experienced analyst.
We generate a Total Regression Score, a Covid-19 Risk Rate and a Covid-19 Benefit Rate designed to identify companies who are most at risk or have the most to gain in a Pandemic affected economy.
We complete a financial analysis of each company using data taken from their most recently audited financial statements. Our goal is to provide a snapshot of a company’s financial condition and ability to survive a prolonged period of reduced growth, and/or finance growth or restructuring to take advantage of new opportunities.
Cash Flows are Critical
We believe that cash flow is a critical metric in the near and medium term. Companies without sufficient cash flow to service debt properly are at higher risk.
Leverage Ratios as a Focus of Stress
Debt ratios indicate potential risks to future financing ability or can be used as a barometer of the defensive position of the company. They are long-term solvency metrics and reflect the degree to which the company is financing its operation through debt versus equity. If a company has poor leverage ratios, it might need to aggressively finance its growth through debt and as a result require more and more cash flow from operations to adequately service its debt. Our view is that companies with less debt are more likely to be able to withstand challenges or fund opportunities created by the pandemic.
Cash Flow Stress Test Analysis
NXTanalytic completes a simple cash flow stress test by reducing Cash Flow From Operations by three levels: a 10%, 20% and 30% reduction. We then rate the EV/FCF ratio. We use the EV/FCF ratio to assess the total valuation of the company in relation to its ability to generate cash flows as a measure of a company’s ability to service its debts from cash flow.