While small-cap stocks, such as ACI Worldwide, Inc. (NASDAQ:ACIW) with its market cap of US$3.5b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Let’s work through some financial health checks you may wish to consider if you’re interested in this stock. However, these checks don’t give you a full picture, so I recommend you dig deeper yourself into ACIW here.
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
ACIW’s Debt (And Cash Flows)
ACIW has built up its total debt levels in the last twelve months, from US$682m to US$743m , which includes long-term debt. With this increase in debt, ACIW’s cash and short-term investments stands at US$176m to keep the business going. Moreover, ACIW has generated US$181m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 24%, indicating that ACIW’s operating cash is sufficient to cover its debt.
Can ACIW meet its short-term obligations with the cash in hand?
At the current liabilities level of US$260m, it appears that the company has been able to meet these commitments with a current assets level of US$514m, leading to a 1.97x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Software companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does ACIW face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 72%, ACIW can be considered as an above-average leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In ACIW’s case, the ratio of 3.69x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as ACIW’s high interest coverage is seen as responsible and safe practice.
ACIW’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure ACIW has company-specific issues impacting its capital structure decisions. You should continue to research ACI Worldwide to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ACIW’s future growth? Take a look at our free research report of analyst consensus for ACIW’s outlook.
- Valuation: What is ACIW 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 ACIW 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 firstname.lastname@example.org. 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.