While small-cap stocks, such as StatPro Group plc (LON:SOG) with its market cap of UK£84m, 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, especially ones that are currently loss-making, are more likely to be higher risk. So, understanding the company’s financial health becomes 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 recommend you dig deeper yourself into SOG here.
Does SOG produce enough cash relative to debt?
SOG’s debt levels surged from UK£22m to UK£26m over the last 12 months , which includes long-term debt. With this rise in debt, SOG currently has UK£3.2m remaining in cash and short-term investments , ready to deploy into the business. On top of this, SOG has produced cash from operations of UK£7.9m during the same period of time, leading to an operating cash to total debt ratio of 30%, meaning that SOG’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 SOG’s case, it is able to generate 0.3x cash from its debt capital.
Can SOG meet its short-term obligations with the cash in hand?
With current liabilities at UK£33m, it seems that the business may not have an easy time meeting these commitments with a current assets level of UK£18m, leading to a current ratio of 0.53x.
Does SOG face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 89%, SOG can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since SOG is presently 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.
Although SOG’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. But, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I’m sure SOG has company-specific issues impacting its capital structure decisions. I suggest you continue to research StatPro Group to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SOG’s future growth? Take a look at our free research report of analyst consensus for SOG’s outlook.
- Valuation: What is SOG 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 SOG 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.