Expert System Sp.A. (BIT:EXSY): Time For A Financial Health Check

Expert System Sp.A. (BIT:EXSY) is a small-cap stock with a market capitalization of €41.98M. 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? Software companies, especially ones that are currently loss-making, tend to be high risk. Assessing first and foremost the financial health is essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, I know these factors are very high-level, so I suggest you dig deeper yourself into EXSY here.

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

EXSY's debt levels have fallen from €21.47M to €20.06M over the last 12 months , which comprises of short- and long-term debt. With this reduction in debt, EXSY currently has €15.85M remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn't be too useful, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of EXSY’s operating efficiency ratios such as ROA here.

Can EXSY pay its short-term liabilities?

With current liabilities at €16.80M, it appears that the company has been able to meet these commitments with a current assets level of €37.05M, leading to a 2.21x current account ratio. For Software companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

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

EXSY is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since EXSY is presently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.

Next Steps:

EXSY’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven't considered other factors such as how EXSY has been performing in the past. I suggest you continue to research Expert System to get a more holistic view of the stock by looking at:

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

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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.