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While small-cap stocks, such as Zix Corporation (NASDAQ:ZIXI) with its market cap of US$471m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, this is just a partial view of the stock, and I’d encourage you to dig deeper yourself into ZIXI here.
ZIXI’s Debt (And Cash Flows)
ZIXI has increased its debt level by about US$179m over the last 12 months – which includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at US$17m to keep the business going. On top of this, ZIXI has generated cash from operations of US$15m during the same period of time, leading to an operating cash to total debt ratio of 8.5%, signalling that ZIXI’s current level of operating cash is not high enough to cover debt.
Does ZIXI’s liquid assets cover its short-term commitments?
With current liabilities at US$73m, it appears that the company may not be able to easily meet these obligations given the level of current assets of US$32m, with a current ratio of 0.44x. The current ratio is the number you get when you divide current assets by current liabilities.
Is ZIXI’s debt level acceptable?
With total debt exceeding equity, ZIXI is considered a highly levered company. 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 test if ZIXI’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 ZIXI, the ratio of 3.01x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as ZIXI’s high interest coverage is seen as responsible and safe practice.
ZIXI’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. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for ZIXI's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Zix to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ZIXI’s future growth? Take a look at our free research report of analyst consensus for ZIXI’s outlook.
- Valuation: What is ZIXI 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 ZIXI 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.