While small-cap stocks, such as NetSol Technologies Inc (NASDAQ:NTWK) with its market cap of US$78m, 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, even ones that are profitable, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into NTWK here.
How much cash does NTWK generate through its operations?
NTWK has shrunken its total debt levels in the last twelve months, from US$10m to US$8.7m , which is mainly comprised of near term debt. With this reduction in debt, NTWK’s cash and short-term investments stands at US$20m , ready to deploy into the business. On top of this, NTWK has generated cash from operations of US$20m during the same period of time, leading to an operating cash to total debt ratio of 224%, meaning that NTWK’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In NTWK’s case, it is able to generate 2.24x cash from its debt capital.
Does NTWK’s liquid assets cover its short-term commitments?
Looking at NTWK’s US$21m in current liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.46x. Generally, for Software companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can NTWK service its debt comfortably?
NTWK’s level of debt is appropriate relative to its total equity, at 13%. This range is considered safe as NTWK is not taking on too much debt obligation, which may be constraining for future growth.
NTWK’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for NTWK’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research NetSol Technologies to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for NTWK’s future growth? Take a look at our free research report of analyst consensus for NTWK’s outlook.
- Valuation: What is NTWK 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 NTWK 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 firstname.lastname@example.org.