While small-cap stocks, such as MAM Software Group Inc (NASDAQ:MAMS) with its market cap of US$105m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Software industry, even ones that are profitable, tend to be high risk. So, understanding the company’s financial health becomes crucial. Here are few basic financial health checks you should consider before taking the plunge. However, this commentary is still very high-level, so I suggest you dig deeper yourself into MAMS here.
Does MAMS produce enough cash relative to debt?
MAMS has shrunken its total debt levels in the last twelve months, from US$7.7m to US$6.1m , which includes long-term debt. With this debt payback, the current cash and short-term investment levels stands at US$4.2m for investing into the business. Additionally, MAMS has produced cash from operations of US$5.3m in the last twelve months, leading to an operating cash to total debt ratio of 86%, meaning that MAMS’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In MAMS’s case, it is able to generate 0.86x cash from its debt capital.
Can MAMS pay its short-term liabilities?
With current liabilities at US$11m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.03x. Usually, for Software companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Can MAMS service its debt comfortably?
With debt reaching 41% of equity, MAMS may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if MAMS’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For MAMS, the ratio of 12.49x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as MAMS’s high interest coverage is seen as responsible and safe practice.
Although MAMS’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure MAMS has company-specific issues impacting its capital structure decisions. I recommend you continue to research MAM Software Group to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for MAMS’s future growth? Take a look at our free research report of analyst consensus for MAMS’s outlook.
- Valuation: What is MAMS 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 MAMS 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
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