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Expert System S.p.A. (BIT:EXSY) is a small-cap stock with a market capitalization of €51m. 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, in particular ones that run negative earnings, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is crucial. I believe these basic checks tell most of the story you need to know. Nevertheless, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into EXSY here.
Does EXSY produce enough cash relative to debt?
EXSY's debt levels have fallen from €21m to €19m over the last 12 months , which also accounts for long term debt. With this debt payback, the current cash and short-term investment levels stands at €14m , ready to deploy 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. For this article’s sake, 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.
Does EXSY’s liquid assets cover its short-term commitments?
With current liabilities at €15m, it appears that the company has been able to meet these commitments with a current assets level of €35m, leading to a 2.24x current account ratio. Generally, for Software companies, this is a reasonable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Is EXSY’s debt level acceptable?
With total debt exceeding equities, EXSY is considered a highly levered company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since EXSY is currently unprofitable, sustainability of its current state of operations becomes a concern. 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:
Although EXSY’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. Since there is also no concerns around EXSY's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure EXSY has company-specific issues impacting its capital structure decisions. You should continue to research Expert System to get a more holistic view of the small-cap by looking at:
- 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.
- 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.
- 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.
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.
About BIT:EXAI
Expert.ai
An artificial intelligence (AI) platform company, develops and sells cognitive computing software products based on AI algorithms to read and understand written language worldwide.
Reasonable growth potential with adequate balance sheet.
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