What You Must Know About Magic Software Enterprises Ltd’s (NASDAQ:MGIC) Financial Strength
Magic Software Enterprises Ltd (NASDAQ:MGIC) is a small-cap stock with a market capitalization of US$441.3m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Companies operating in the Software industry, even ones that are profitable, are more likely to be higher risk. Assessing first and foremost the financial health is vital. 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 recommend you dig deeper yourself into MGIC here.
Does MGIC produce enough cash relative to debt?
MGIC has shrunken its total debt levels in the last twelve months, from US$46.0m to US$34.8m , which comprises of short- and long-term debt. With this debt repayment, MGIC currently has US$91.2m remaining in cash and short-term investments , ready to deploy into the business. On top of this, MGIC has generated cash from operations of US$27.1m during the same period of time, resulting in an operating cash to total debt ratio of 77.9%, indicating that MGIC’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In MGIC’s case, it is able to generate 0.78x cash from its debt capital.
Can MGIC meet its short-term obligations with the cash in hand?
With current liabilities at US$58.7m, it appears that the company has been able to meet these commitments with a current assets level of US$183.3m, leading to a 3.12x current account ratio. However, anything above 3x is considered high and could mean that MGIC has too much idle capital in low-earning investments.
Can MGIC service its debt comfortably?
With a debt-to-equity ratio of 14.5%, MGIC’s debt level may be seen as prudent. MGIC is not taking on too much debt commitment, which may be constraining for future growth.
Next Steps:
MGIC 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 MGIC has company-specific issues impacting its capital structure decisions. I recommend you continue to research Magic Software Enterprises to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for MGIC’s future growth? Take a look at our free research report of analyst consensus for MGIC’s outlook.
Valuation: What is MGIC 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 MGIC 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 editorial-team@simplywallst.com.
