While small-cap stocks, such as Verint Systems Inc. (NASDAQ:VRNT) with its market cap of US$4.1b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Understanding the company's financial health becomes 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. Nevertheless, these checks don't give you a full picture, so I suggest you dig deeper yourself into VRNT here.
VRNT’s Debt (And Cash Flows)
VRNT's debt level has been constant at around US$789m over the previous year – this includes long-term debt. At this current level of debt, the current cash and short-term investment levels stands at US$404m , ready to be used for running the business. On top of this, VRNT has produced US$215m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 27%, meaning that VRNT’s operating cash is sufficient to cover its debt.
Does VRNT’s liquid assets cover its short-term commitments?
Looking at VRNT’s US$662m in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$1.0b, with a current ratio of 1.52x. The current ratio is calculated by dividing current assets by current liabilities. For Software companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.
Is VRNT’s debt level acceptable?
With debt reaching 63% of equity, VRNT may be thought of as relatively highly levered. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In VRNT's case, the ratio of 3.67x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving VRNT ample headroom to grow its debt facilities.
Although VRNT’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 VRNT's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for VRNT's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Verint Systems to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for VRNT’s future growth? Take a look at our free research report of analyst consensus for VRNT’s outlook.
- Valuation: What is VRNT 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 VRNT 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.