While small-cap stocks, such as SoftTech Engineers Limited (NSEI:SOFTTECH) with its market cap of ₹882.41M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Software companies, even ones that are profitable, are inclined towards being 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. Nevertheless, I know these factors are very high-level, so I recommend you dig deeper yourself into SOFTTECH here.
How does SOFTTECH’s operating cash flow stack up against its debt?
SOFTTECH’s debt levels have fallen from ₹183.90M to ₹173.14M over the last 12 months , which is made up of current and long term debt. With this debt payback, SOFTTECH’s cash and short-term investments stands at ₹32.59M , ready to deploy into the business. Moreover, SOFTTECH has produced cash from operations of ₹94.32M in the last twelve months, resulting in an operating cash to total debt ratio of 54.48%, signalling that SOFTTECH’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of 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 been able to meet these obligations given the level of current assets of ₹400.62M, with a current ratio of 1.96x. Usually, for Software companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can SOFTTECH service its debt comfortably?
SOFTTECH is a relatively highly levered company with a debt-to-equity of 56.53%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if SOFTTECH’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 SOFTTECH, 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:
SOFTTECH’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. Since there is also no concerns around SOFTTECH’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for SOFTTECH’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research SoftTech Engineers to get a more holistic view of the small-cap by looking at:
- 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.
- Historical Performance: What has SOFTTECH’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.