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While small-cap stocks, such as SVMK Inc. (NASDAQ:SVMK) with its market cap of US$1.7b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Software industry, especially ones that are currently loss-making, tend to be high risk. Assessing first and foremost the financial health is vital. Here are few basic financial health checks you should consider before taking the plunge. Though, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into SVMK here.
How does SVMK’s operating cash flow stack up against its debt?
Over the past year, SVMK has reduced its debt from US$412m to US$309m , which includes long-term debt. With this debt payback, SVMK currently has US$154m remaining in cash and short-term investments for investing into the business. Moreover, SVMK has produced cash from operations of US$45m during the same period of time, resulting in an operating cash to total debt ratio of 15%, signalling that SVMK’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for unprofitable businesses as traditional metrics such as return on asset (ROA) requires positive earnings. In SVMK’s case, it is able to generate 0.15x cash from its debt capital.
Can SVMK meet its short-term obligations with the cash in hand?
At the current liabilities level of US$136m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.25x. Usually, for Software companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can SVMK service its debt comfortably?
With total debt exceeding equities, SVMK is considered a highly levered company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since SVMK is presently loss-making, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Although SVMK’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around SVMK’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for SVMK’s financial health. Other important fundamentals need to be considered alongside. You should continue to research SVMK to get a better picture of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for SVMK’s future growth? Take a look at our free research report of analyst consensus for SVMK’s outlook.
Valuation: What is SVMK 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 SVMK 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.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.