Investors are always looking for growth in small-cap stocks like Quality Systems Inc (NASDAQ:QSII), with a market cap of US$1.25b. However, an important fact which most ignore is: how financially healthy is the business? Healthcare Services companies, even ones that are profitable, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is essential. I believe these basic checks tell most of the story you need to know. Nevertheless, I know these factors are very high-level, so I recommend you dig deeper yourself into QSII here.
How does QSII’s operating cash flow stack up against its debt?
Over the past year, QSII has ramped up its debt from US$15.00m to US$37.00m – this includes both the current and long-term debt. With this rise in debt, QSII currently has US$28.85m remaining in cash and short-term investments for investing into the business. On top of this, QSII has generated cash from operations of US$76.59m over the same time period, resulting in an operating cash to total debt ratio of 206.99%, indicating that QSII’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In QSII’s case, it is able to generate 2.07x cash from its debt capital.
Can QSII meet its short-term obligations with the cash in hand?
At the current liabilities level of US$134.59m liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$141.66m, leading to a 1.05x current account ratio. Generally, for Healthcare Services companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Can QSII service its debt comfortably?With debt at 11.44% of equity, QSII may be thought of as appropriately levered. QSII is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if QSII’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For QSII, the ratio of 8.01x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving QSII ample headroom to grow its debt facilities.
QSII has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, 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 QSII has been performing in the past. You should continue to research Quality Systems to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for QSII’s future growth? Take a look at our free research report of analyst consensus for QSII’s outlook.
- Valuation: What is QSII 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 QSII 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.