While small-cap stocks, such as Carl Data Solutions Inc (FRA:7C5) with its market cap of €4m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Software companies, in particular ones that run negative earnings, tend to be high risk. Assessing first and foremost the financial health is crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into 7C5 here.
How much cash does 7C5 generate through its operations?
7C5 has shrunken its total debt levels in the last twelve months, from CA$837k to CA$614k – this includes both the current and long-term debt. With this debt payback, the current cash and short-term investment levels stands at CA$248k for investing into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can take a look at some of 7C5’s operating efficiency ratios such as ROA here.
Can 7C5 meet its short-term obligations with the cash in hand?
Looking at 7C5’s most recent CA$977k liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.15x. 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.
Is 7C5’s debt level acceptable?
With a debt-to-equity ratio of 18%, 7C5’s debt level may be seen as prudent. 7C5 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. 7C5’s risk around capital structure is low, and the company has the headroom and ability to raise debt should it need to in the future.
7C5’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how 7C5 has been performing in the past. You should continue to research Carl Data Solutions to get a better picture of the stock by looking at:
- Historical Performance: What has 7C5’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.