Are TXT e-solutions Sp.A.'s (BIT:TXT) Interest Costs Too High?

While small-cap stocks, such as TXT e-solutions Sp.A. (BIT:TXT) with its market cap of €127.64M, 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 crucial. I believe these basic checks tell most of the story you need to know. Though, since I only look at basic financial figures, I recommend you dig deeper yourself into TXT here.

Does TXT generate enough cash through operations?

TXT has built up its total debt levels in the last twelve months, from €820.59K to €2.20M – this includes both the current and long-term debt. With this increase in debt, the current cash and short-term investment levels stands at €7.57M for investing into the business. On top of this, TXT has produced €8.76M in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 398.24%, meaning that TXT’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In TXT’s case, it is able to generate 3.98x cash from its debt capital.

Does TXT’s liquid assets cover its short-term commitments?

With current liabilities at €21.05M, the company has been able to meet these commitments with a current assets level of €37.09M, leading to a 1.76x current account ratio. Generally, for Software companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

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

TXT’s level of debt is low relative to its total equity, at 5.59%. This range is considered safe as TXT is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether TXT is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In TXT's, case, the ratio of 60.99x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

TXT has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven't considered other factors such as how TXT has been performing in the past. You should continue to research TXT e-solutions to get a more holistic view of the stock by looking at:

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