Computer Programs and Systems, Inc. (NASDAQ:CPSI) is a small-cap stock with a market capitalization of US$374m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Assessing first and foremost the financial health is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, these checks don't give you a full picture, so I suggest you dig deeper yourself into CPSI here.
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Does CPSI Produce Much Cash Relative To Its Debt?
Over the past year, CPSI has reduced its debt from US$142m to US$130m , which includes long-term debt. With this debt payback, CPSI currently has US$4.4m remaining in cash and short-term investments , ready to be used for running the business. Additionally, CPSI has generated US$29m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 22%, indicating that CPSI’s operating cash is sufficient to cover its debt.
Does CPSI’s liquid assets cover its short-term commitments?
With current liabilities at US$40m, it seems that the business has been able to meet these obligations given the level of current assets of US$68m, with a current ratio of 1.71x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Healthcare Services companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Does CPSI face the risk of succumbing to its debt-load?
With debt reaching 79% of equity, CPSI may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can check to see whether CPSI is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In CPSI's, case, the ratio of 3.14x suggests that interest is appropriately 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.
CPSI’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven't considered other factors such as how CPSI has been performing in the past. You should continue to research Computer Programs and Systems to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CPSI’s future growth? Take a look at our free research report of analyst consensus for CPSI’s outlook.
- Valuation: What is CPSI 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 CPSI 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.