Investors are always looking for growth in small-cap stocks like Axway Software SA (EPA:AXW), with a market cap of €257m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company’s balance sheet strength. However, potential investors would need to take a closer look, and I recommend you dig deeper yourself into AXW here.
Does AXW Produce Much Cash Relative To Its Debt?
Over the past year, AXW has reduced its debt from €52m to €46m , which also accounts for long term debt. With this debt payback, AXW currently has €36m remaining in cash and short-term investments , ready to be used for running the business. On top of this, AXW has produced cash from operations of €23m over the same time period, leading to an operating cash to total debt ratio of 49%, signalling that AXW’s debt is appropriately covered by operating cash.
Can AXW meet its short-term obligations with the cash in hand?
At the current liabilities level of €138m, it seems that the business arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.95x. The current ratio is calculated by dividing current assets by current liabilities.
Can AXW service its debt comfortably?
With a debt-to-equity ratio of 13%, AXW’s debt level may be seen as prudent. AXW is not taking on too much debt commitment, which may be constraining for future growth. We can test if AXW’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For AXW, the ratio of 30.6x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving AXW ample headroom to grow its debt facilities.
AXW has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. But, as shareholders, you should try and determine whether this level of debt is justified for AXW, especially when liquidity may also be an issue. Keep in mind I haven’t considered other factors such as how AXW has been performing in the past. You should continue to research Axway Software to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AXW’s future growth? Take a look at our free research report of analyst consensus for AXW’s outlook.
- Valuation: What is AXW 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 AXW 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.
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