Smith Micro Software Inc (NASDAQ:SMSI) is a small-cap stock with a market capitalization of $36.71M. 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 Software industry, especially ones that are currently loss-making, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is essential. I believe these basic checks tell most of the story you need to know. Though, I know these factors are very high-level, so I recommend you dig deeper yourself into SMSI here.
How does SMSI’s operating cash flow stack up against its debt?
Over the past year, SMSI has borrowed debt capital of around $1.9M – this includes both the current and long-term debt. With this ramp up in debt, the current cash and short-term investment levels stands at $2.2M , ready to deploy into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can examine some of SMSI’s operating efficiency ratios such as ROA here.
Does SMSI’s liquid assets cover its short-term commitments?
With current liabilities at $5.5M, it appears that the company has been able to meet these commitments with a current assets level of $7.9M, leading to a 1.44x current account ratio. Usually, for Software companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Is SMSI’s debt level acceptable?
With debt reaching 80.93% of equity, SMSI may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since SMSI is currently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
SMSI’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. Keep in mind I haven’t considered other factors such as how SMSI has been performing in the past. You should continue to research Smith Micro Software to get a better picture of the stock by looking at:
1. Historical Performance: What has SMSI’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.
2. 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.