SCISYS PLC (LON:SSY) is a small-cap stock with a market capitalization of UK£53m. 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 IT industry, even ones that are profitable, are inclined towards being higher risk. So, understanding the company’s financial health becomes crucial. Here are few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into SSY here.
Does SSY produce enough cash relative to debt?
Over the past year, SSY has reduced its debt from UK£16m to UK£13m , which comprises of short- and long-term debt. With this debt payback, SSY currently has UK£9m remaining in cash and short-term investments for investing into the business. Additionally, SSY has produced cash from operations of UK£11m in the last twelve months, leading to an operating cash to total debt ratio of 86%, indicating that SSY’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In SSY’s case, it is able to generate 0.86x cash from its debt capital.
Can SSY pay its short-term liabilities?
Looking at SSY’s most recent UK£25m liabilities, it seems that the business has been able to meet these commitments with a current assets level of UK£35m, leading to a 1.39x current account ratio. For IT companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does SSY face the risk of succumbing to its debt-load?
With debt reaching 48% of equity, SSY may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether SSY is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In SSY’s, case, the ratio of 7.48x suggests that interest is appropriately 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.
Although SSY’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure SSY has company-specific issues impacting its capital structure decisions. I recommend you continue to research SCISYS to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SSY’s future growth? Take a look at our free research report of analyst consensus for SSY’s outlook.
- Valuation: What is SSY 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 SSY 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 email@example.com.