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ServiceSource International, Inc. (NASDAQ:SREV): Time For A Financial Health Check

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Rowena Monahan
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ServiceSource International, Inc. (NASDAQ:SREV) is a small-cap stock with a market capitalization of US$93m. 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, especially ones that are currently loss-making, are inclined towards being higher risk. Assessing first and foremost the financial health is essential. I believe these basic checks tell most of the story you need to know. However, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into SREV here.

Does SREV produce enough cash relative to debt?

SREV’s debt levels have fallen from US$142m to US$35m over the last 12 months , which includes long-term debt. With this debt payback, SREV currently has US$64m remaining in cash and short-term investments for investing into the business. Moreover, SREV has generated US$19m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 54%, meaning that SREV’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency for unprofitable businesses as traditional metrics such as return on asset (ROA) requires positive earnings. In SREV’s case, it is able to generate 0.54x cash from its debt capital.

Can SREV pay its short-term liabilities?

Looking at SREV’s US$30m in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$118m, with a current ratio of 3.91x. Having said that, many consider a ratio above 3x to be high.

NasdaqGS:SREV Historical Debt January 23rd 19
NasdaqGS:SREV Historical Debt January 23rd 19

Does SREV face the risk of succumbing to its debt-load?

SREV’s level of debt is appropriate relative to its total equity, at 35%. SREV is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. Investors’ risk associated with debt is very low with SREV, and the company has plenty of headroom and ability to raise debt should it need to in the future.

Next Steps:

SREV has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure SREV has company-specific issues impacting its capital structure decisions. I recommend you continue to research ServiceSource International to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for SREV’s future growth? Take a look at our free research report of analyst consensus for SREV’s outlook.

  2. Valuation: What is SREV 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 SREV is currently mispriced by the market.

  3. 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 editorial-team@simplywallst.com.