NetSol Technologies Inc (NASDAQ:NTWK) is a small-cap stock with a market capitalization of USD $36.12M. 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. The significance of doing due diligence on a company’s financial strength stems from the fact that over 20,000 companies go bankrupt in every quarter in the US alone. Thus, it becomes utmost important for an investor to test a company’s resilience for such contingencies. In simple terms, I believe these three small calculations tell most of the story you need to know. Check out our latest analysis for NetSol Technologies
Does NTWK generate an acceptable amount of cash through operations?
While failure to manage cash has been one of the major reasons behind the demise of a lot of small businesses, mismanagement comes into the light during tough situations such as an economic recession. Furthermore, failure to service debt can hurt its reputation, making funding expensive in the future. Can NTWK pay off what it owes to its debtholder by using only cash from its operational activities? Last year, NTWK’s operating cash flow was 0.04x its current debt. This means what NTWK can generate on an annual basis only covers less than a tenth of what it actually owes its debtors in the near term, which raises a red flag.
Can NTWK pay its short-term liabilities?
What about its other commitments such as payments to suppliers and salaries to its employees? As cash flow from operation is hindered by adverse events, NTWK may need to liquidate its short-term assets to meet these upcoming payments. We test for NTWK’s ability to meet these needs by comparing its cash and short-term investments with current liabilities. Our analysis shows that NTWK does have enough liquid assets on hand to meet its upcoming liabilities, which lowers our concerns should adverse events arise.
Is NTWK’s level of debt at an acceptable level?
Debt-to-equity ratio tells us how much of the asset debtors could claim if the company went out of business. In the case of NTWK, the debt-to-equity ratio is 13.54%, which means its debt level does not pose a threat to its operations right now.
Are you a shareholder? NTWK’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Given that its financial position may be different. You should always be keeping on top of market expectations for NTWK’s future growth on our free analysis platform.
Are you a potential investor? NetSol Technologies currently has financial flexibility to ramp up growth in the future. Furthermore, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. To gain more confidence in the stock, you need to further examine NTWK’s track record. As a following step, you should take a look at NTWK’s past performance analysis on our free platform to figure out NTWK’s financial health position.
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.