Are SoftTech Engineers Limited's (NSE:SOFTTECH) Interest Costs Too High?

SoftTech Engineers Limited (NSE:SOFTTECH) is a small-cap stock with a market capitalization of ₹554.04m. 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, even ones that are profitable, are more likely to be higher risk. Assessing first and foremost the financial health is vital. I believe these basic checks tell most of the story you need to know. Though, since I only look at basic financial figures, I suggest you dig deeper yourself into SOFTTECH here.

How does SOFTTECH’s operating cash flow stack up against its debt?

SOFTTECH has shrunken its total debt levels in the last twelve months, from ₹183.90m to ₹173.14m , which comprises of short- and long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at ₹32.59m , ready to deploy into the business. On top of this, SOFTTECH has generated ₹94.32m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 54.48%, signalling that SOFTTECH’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In SOFTTECH’s case, it is able to generate 0.54x cash from its debt capital.

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

At the current liabilities level of ₹204.61m liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.96x. For Software companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too capital in low return investments.

Does SOFTTECH face the risk of succumbing to its debt-load?

With a debt-to-equity ratio of 56.53%, SOFTTECH can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In SOFTTECH's case, the ratio of 5.38x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as SOFTTECH’s high interest coverage is seen as responsible and safe practice.

Next Steps:

Although SOFTTECH’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for SOFTTECH's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research SoftTech Engineers to get a better picture of the small-cap by looking at:

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com

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.