Are Monotype Imaging Holdings Inc’s (NASDAQ:TYPE) Interest Costs Too High?
Investors are always looking for growth in small-cap stocks like Monotype Imaging Holdings Inc (NASDAQ:TYPE), with a market cap of $975.10M. However, an important fact which most ignore is: how financially healthy is the business? Software companies, even ones that are profitable, are inclined towards being higher risk. Assessing first and foremost the financial health is crucial. I believe these basic checks tell most of the story you need to know. Nevertheless, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into TYPE here.
Does TYPE generate enough cash through operations?
Over the past year, TYPE has borrowed debt capital of around $105.0M comprising of short- and long-term debt. With this growth in debt, TYPE’s cash and short-term investments stands at $91.4M , ready to deploy into the business. On top of this, TYPE has generated $40.7M in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 38.80%, indicating that TYPE’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In TYPE’s case, it is able to generate 0.39x cash from its debt capital.
Can TYPE meet its short-term obligations with the cash in hand?
Looking at TYPE’s most recent $48.5M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of $125.6M, with a current ratio of 2.59x. For Software companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Does TYPE face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 30.38%, TYPE’s debt level may be seen as prudent. This range is considered safe as TYPE is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if TYPE’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 TYPE, the ratio of 3.46x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Next Steps:
TYPE has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for TYPE’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Monotype Imaging Holdings to get a better picture of the stock by looking at:
1. Future Outlook: What are well-informed industry analysts predicting for TYPE’s future growth? Take a look at our free research report of analyst consensus for TYPE’s outlook.
2. Valuation: What is TYPE 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 TYPE 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.
To help readers see pass 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.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
