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Extreme Networks, Inc. (NASDAQ:EXTR) is a small-cap stock with a market capitalization of US$797m. 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? Given that EXTR is not presently profitable, it’s essential to assess the current state of its operations and pathway to profitability. The following basic checks can help you get a picture of the company's balance sheet strength. However, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into EXTR here.
Does EXTR Produce Much Cash Relative To Its Debt?
Over the past year, EXTR has maintained its debt levels at around US$181m – this includes long-term debt. At this current level of debt, EXTR currently has US$157m remaining in cash and short-term investments to keep the business going. On top of this, EXTR has generated US$100m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 55%, indicating that EXTR’s current level of operating cash is high enough to cover debt.
Can EXTR meet its short-term obligations with the cash in hand?
At the current liabilities level of US$303m, 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 the number you get when you divide current assets by current liabilities. For Communications companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is EXTR’s debt level acceptable?
Since total debt levels exceed equity, EXTR is a highly leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. Though, since EXTR is currently unprofitable, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
EXTR’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 EXTR has been performing in the past. I suggest you continue to research Extreme Networks to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for EXTR’s future growth? Take a look at our free research report of analyst consensus for EXTR’s outlook.
- Valuation: What is EXTR 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 EXTR 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 email@example.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.