Investors are always looking for growth in small-cap stocks like Streamwide S.A. (EPA:ALSTW), with a market cap of €21m. However, an important fact which most ignore is: how financially healthy is the business? Software companies, in particular ones that run negative earnings, are more likely to be higher risk. Assessing first and foremost the financial health is crucial. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into ALSTW here.
How much cash does ALSTW generate through its operations?
ALSTW has shrunken its total debt levels in the last twelve months, from €1.8m to €1.5m – this includes long-term debt. With this debt payback, ALSTW currently has €4.4m remaining in cash and short-term investments , ready to deploy into the business. Moreover, ALSTW has produced cash from operations of €848k during the same period of time, resulting in an operating cash to total debt ratio of 57%, meaning that ALSTW’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency for loss making businesses since metrics such as return on asset (ROA) requires a positive net income. In ALSTW’s case, it is able to generate 0.57x cash from its debt capital.
Can ALSTW meet its short-term obligations with the cash in hand?
With current liabilities at €3.7m, it appears that the company has been able to meet these obligations given the level of current assets of €9.0m, with a current ratio of 2.43x. Generally, for Software 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 ALSTW’s debt level acceptable?
With debt at 14% of equity, ALSTW may be thought of as appropriately levered. ALSTW is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. ALSTW’s risk around capital structure is low, and the company has the headroom and ability to raise debt should it need to in the future.
Next Steps:
ALSTW’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure ALSTW has company-specific issues impacting its capital structure decisions. You should continue to research Streamwide to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ALSTW’s future growth? Take a look at our free research report of analyst consensus for ALSTW’s outlook.
- Historical Performance: What has ALSTW’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 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 editorial-team@simplywallst.com.