While small-cap stocks, such as Sapiens International Corporation N.V. (NASDAQ:SPNS) with its market cap of US$604m, 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, even ones that are profitable, tend to be high risk. Assessing first and foremost the financial health is vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, since I only look at basic financial figures, I recommend you dig deeper yourself into SPNS here.
How does SPNS’s operating cash flow stack up against its debt?
SPNS has sustained its debt level by about US$78m over the last 12 months including long-term debt. At this current level of debt, the current cash and short-term investment levels stands at US$64m for investing into the business. Moreover, SPNS has generated US$19m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 24%, meaning that SPNS’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In SPNS’s case, it is able to generate 0.24x cash from its debt capital.
Can SPNS pay its short-term liabilities?
Looking at SPNS’s US$96m in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.41x. 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 SPNS service its debt comfortably?
With a debt-to-equity ratio of 39%, SPNS’s debt level may be seen as prudent. This range is considered safe as SPNS is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if SPNS’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For SPNS, the ratio of 11.85x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
SPNS’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. 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 SPNS’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Sapiens International to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SPNS’s future growth? Take a look at our free research report of analyst consensus for SPNS’s outlook.
- Valuation: What is SPNS 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 SPNS 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.