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What Does Objective Corporation Limited's (ASX:OCL) Balance Sheet Tell Us About It?

Simply Wall St

Objective Corporation Limited (ASX:OCL) is a small-cap stock with a market capitalization of AU$260m. 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? Evaluating financial health as part of your investment thesis is essential, 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. However, this is just a partial view of the stock, and I suggest you dig deeper yourself into OCL here.

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OCL’s Debt (And Cash Flows)

Over the past year, OCL has borrowed debt capital of around AU$13m – which includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at AU$29m , ready to be used for running the business. Additionally, OCL has produced cash from operations of AU$17m in the last twelve months, resulting in an operating cash to total debt ratio of 133%, indicating that OCL’s debt is appropriately covered by operating cash.

Can OCL meet its short-term obligations with the cash in hand?

With current liabilities at AU$31m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.29x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Software companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.

ASX:OCL Historical Debt, May 23rd 2019

Can OCL service its debt comfortably?

OCL is a relatively highly levered company with a debt-to-equity of 53%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether OCL 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 OCL's, case, the ratio of 37.8x suggests that interest is comfortably covered, which means that lenders may be willing to lend out more funding as OCL’s high interest coverage is seen as responsible and safe practice.

Next Steps:

Although OCL’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around OCL's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for OCL's financial health. Other important fundamentals need to be considered alongside. You should continue to research Objective to get a better picture of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for OCL’s future growth? Take a look at our free research report of analyst consensus for OCL’s outlook.
  2. Valuation: What is OCL 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 OCL is currently mispriced by the market.
  3. 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 editorial-team@simplywallst.com. 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.