While small-cap stocks, such as ForeScout Technologies Inc (NASDAQ:FSCT) with its market cap of US$1.2b, 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, are inclined towards being higher risk. Assessing first and foremost the financial health is vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into FSCT here.
Does FSCT produce enough cash relative to debt?
FSCT has shrunken its total debt levels in the last twelve months, from US$25m to US$17m , which includes long-term debt. With this reduction in debt, FSCT’s cash and short-term investments stands at US$210m for investing into the business. Moreover, FSCT has produced cash from operations of US$1.1m over the same time period, resulting in an operating cash to total debt ratio of 6.3%, indicating that FSCT’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency for unprofitable companies as traditional metrics such as return on asset (ROA) requires positive earnings. In FSCT’s case, it is able to generate 0.063x cash from its debt capital.
Does FSCT’s liquid assets cover its short-term commitments?
At the current liabilities level of US$139m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.16x. For Software companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can FSCT service its debt comfortably?
FSCT’s level of debt is appropriate relative to its total equity, at 14%. This range is considered safe as FSCT is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. Risk around debt is very low for FSCT, and the company also has the ability and headroom to increase debt if needed going forward.
FSCT has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure FSCT has company-specific issues impacting its capital structure decisions. I suggest you continue to research ForeScout Technologies to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for FSCT’s future growth? Take a look at our free research report of analyst consensus for FSCT’s outlook.
- Valuation: What is FSCT 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 FSCT 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.
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 email@example.com.