Computer Programs and Systems, Inc. (NASDAQ:CPSI) is a small-cap stock with a market capitalization of US$374m. 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? Evaluating financial health as part of your investment thesis is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. We’ll look at some basic checks that can form a snapshot the company’s financial strength. However, potential investors would need to take a closer look, and I suggest you dig deeper yourself into CPSI here.
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CPSI’s Debt (And Cash Flows)
Over the past year, CPSI has reduced its debt from US$142m to US$130m , which also accounts for long term debt. With this debt repayment, CPSI’s cash and short-term investments stands at US$4.4m , ready to be used for running the business. On top of this, CPSI has generated US$29m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 22%, signalling that CPSI’s debt is appropriately covered by operating cash.
Can CPSI pay its short-term liabilities?
Looking at CPSI’s US$40m in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$68m, leading to a 1.71x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Healthcare Services 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 CPSI service its debt comfortably?
CPSI is a relatively highly levered company with a debt-to-equity of 79%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether CPSI 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 CPSI’s, case, the ratio of 3.14x suggests that interest is appropriately 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:
CPSI’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 CPSI’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how CPSI has been performing in the past. You should continue to research Computer Programs and Systems to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CPSI’s future growth? Take a look at our free research report of analyst consensus for CPSI’s outlook.
- Valuation: What is CPSI 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 CPSI 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
