While small-cap stocks, such as Finzsoft Solutions Limited (NZSE:FIN) with its market cap of NZ$14m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Software industry, in particular ones that run negative earnings, tend to be high risk. So, understanding the company’s financial health becomes crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, I know these factors are very high-level, so I recommend you dig deeper yourself into FIN here.
Does FIN produce enough cash relative to debt?
FIN has increased its debt level by about NZ$1.1m over the last 12 months . With this increase in debt, the current cash and short-term investment levels stands at NZ$1.5m , ready to deploy into the business. Additionally, FIN has generated cash from operations of NZ$280k in the last twelve months, resulting in an operating cash to total debt ratio of 25%, meaning that FIN’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires a positive net income. In FIN’s case, it is able to generate 0.25x cash from its debt capital.
Does FIN’s liquid assets cover its short-term commitments?
At the current liabilities level of NZ$5.1m, the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.8x.
Can FIN service its debt comfortably?
FIN’s level of debt is appropriate relative to its total equity, at 17%. This range is considered safe as FIN is not taking on too much debt obligation, which may be constraining for future growth. Risk around debt is very low for FIN, and the company also has the ability and headroom to increase debt if needed going forward.
FIN has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. But, as shareholders, you should try and determine whether this level of debt is justified for FIN, especially when liquidity may also be an issue. This is only a rough assessment of financial health, and I’m sure FIN has company-specific issues impacting its capital structure decisions. I suggest you continue to research Finzsoft Solutions to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for FIN’s future growth? Take a look at our free research report of analyst consensus for FIN’s outlook.
- Historical Performance: What has FIN’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.
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 firstname.lastname@example.org.