Is Solteq Oyj's (HEL:SOLTEQ) Balance Sheet Strong Enough To Weather A Storm?

Investors are always looking for growth in small-cap stocks like Solteq Oyj (HLSE:SOLTEQ), with a market cap of €28.02M. However, an important fact which most ignore is: how financially healthy is the business? Software companies, especially ones that are currently loss-making, tend to be high risk. Evaluating financial health as part of your investment thesis is crucial. Here are few basic financial health checks you should consider before taking the plunge. However, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into SOLTEQ here.

Does SOLTEQ generate an acceptable amount of cash through operations?

Over the past year, SOLTEQ has maintained its debt levels at around €25.86M made up of current and long term debt. At this stable level of debt, SOLTEQ's cash and short-term investments stands at €1.55M , 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. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of SOLTEQ’s operating efficiency ratios such as ROA here.

Can SOLTEQ meet its short-term obligations with the cash in hand?

Looking at SOLTEQ’s most recent €14.82M liabilities, it seems that the business has been able to meet these commitments with a current assets level of €16.36M, leading to a 1.1x current account ratio. Generally, for Software companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Can SOLTEQ service its debt comfortably?

With total debt exceeding equities, SOLTEQ is considered a highly levered company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. However, since SOLTEQ is presently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.

Next Steps:

SOLTEQ’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, 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 SOLTEQ has company-specific issues impacting its capital structure decisions. I suggest you continue to research Solteq Oyj to get a more holistic view of the stock by looking at:

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

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.