While small-cap stocks, such as Sescom SA. (WSE:SES) with its market cap of ZŁ58.80M, 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 IT industry, even ones that are profitable, tend to be high risk. Evaluating financial health as part of your investment thesis is essential. Here are few basic financial health checks you should consider before taking the plunge. However, this commentary is still very high-level, so I suggest you dig deeper yourself into SES here.
How does SES’s operating cash flow stack up against its debt?
SES’s debt levels have fallen from ZŁ4.85M to ZŁ3.16M over the last 12 months – this includes both the current and long-term debt. With this debt repayment, SES’s cash and short-term investments stands at ZŁ3.41M for investing into the business. On top of this, SES has generated ZŁ1.98M in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 62.69%, indicating that SES’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In SES’s case, it is able to generate 0.63x cash from its debt capital.
Does SES’s liquid assets cover its short-term commitments?
With current liabilities at ZŁ17.12M, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.98x. Generally, for IT companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is SES’s debt level acceptable?
SES’s level of debt is appropriate relative to its total equity, at 10.76%. SES is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether SES 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 SES’s, case, the ratio of 19.86x 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.
SES has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how SES has been performing in the past. I recommend you continue to research Sescom to get a more holistic view of the stock by looking at:
- Valuation: What is SES 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 SES is currently mispriced by the market.
- Historical Performance: What has SES’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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 pass 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.