Are StatPro Group plc’s (LON:SOG) Interest Costs Too High?

StatPro Group plc (LON:SOG) is a small-cap stock with a market capitalization of UK£69m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Companies operating in the Software industry, especially ones that are currently loss-making, are more likely to be higher risk. Assessing first and foremost the financial health is vital. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into SOG here.

How much cash does SOG generate through its operations?

Over the past year, SOG has ramped up its debt from UK£22m to UK£26m , which includes long-term debt. With this increase 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 generated UK£7.9m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 30%, signalling that SOG’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for loss making businesses since 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 pay its short-term liabilities?

Looking at SOG’s UK£33m in current liabilities, it seems that the business may not be able to easily meet these obligations given the level of current assets of UK£18m, with a current ratio of 0.53x.

AIM:SOG Historical Debt December 15th 18
AIM:SOG Historical Debt December 15th 18

Can SOG service its debt comfortably?

SOG is a relatively highly levered company with a debt-to-equity of 89%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. However, since SOG is currently unprofitable, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.

Next Steps:

SOG’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Though 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 recommend you continue to research StatPro Group to get a better picture of the stock by looking at:

  1. 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.
  2. 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.
  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.

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.