Investors are always looking for growth in small-cap stocks like IDOX plc (LON:IDOX), with a market cap of UK£116m. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Software industry, especially ones that are currently loss-making, are inclined towards being higher risk. So, understanding the company’s financial health becomes essential. I believe these basic checks tell most of the story you need to know. Though, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into IDOX here.
Does IDOX produce enough cash relative to debt?
Over the past year, IDOX has ramped up its debt from UK£34m to UK£36m , which accounts for long term debt. With this rise in debt, the current cash and short-term investment levels stands at UK£10m , ready to deploy into the business. On top of this, IDOX has generated cash from operations of UK£14m during the same period of time, leading to an operating cash to total debt ratio of 40%, indicating that IDOX’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for loss making businesses since metrics such as return on asset (ROA) requires positive earnings. In IDOX’s case, it is able to generate 0.4x cash from its debt capital.
Can IDOX meet its short-term obligations with the cash in hand?
Looking at IDOX’s UK£68m in current liabilities, the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.6x.
Can IDOX service its debt comfortably?
With debt reaching 78% of equity, IDOX may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since IDOX is presently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Although IDOX’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I’m sure IDOX has company-specific issues impacting its capital structure decisions. I suggest you continue to research IDOX to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for IDOX’s future growth? Take a look at our free research report of analyst consensus for IDOX’s outlook.
- Valuation: What is IDOX 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 IDOX 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.