Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Software Aktiengesellschaft (ETR:SOW), with a market cap of €2.4b, often get neglected by retail investors. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. Let’s take a look at SOW’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into SOW here.
How much cash does SOW generate through its operations?
SOW has sustained its debt level by about €315m over the last 12 months including long-term debt. At this current level of debt, SOW’s cash and short-term investments stands at €413m for investing into the business. On top of this, SOW has produced €177m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 56%, meaning that SOW’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In SOW’s case, it is able to generate 0.56x cash from its debt capital.
Does SOW’s liquid assets cover its short-term commitments?
Looking at SOW’s €457m in current liabilities, the company has been able to meet these obligations given the level of current assets of €661m, with a current ratio of 1.45x. For Software companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Does SOW face the risk of succumbing to its debt-load?
SOW’s level of debt is appropriate relative to its total equity, at 27%. SOW is not taking on too much debt commitment, which can be restrictive and risky for equity-holders.
SOW’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. Furthermore, 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 SOW has been performing in the past. I suggest you continue to research Software to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SOW’s future growth? Take a look at our free research report of analyst consensus for SOW’s outlook.
- Valuation: What is SOW 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 SOW 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 firstname.lastname@example.org.