Is Evolving Systems Inc (NASDAQ:EVOL) A Financially Sound Company?

Investors are always looking for growth in small-cap stocks like Evolving Systems Inc (NASDAQ:EVOL), with a market cap of US$41.35M. However, an important fact which most ignore is: how financially healthy is the business? Software companies, even ones that are profitable, tend to be high risk. Evaluating financial health as part of your investment thesis is essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into EVOL here.

How does EVOL’s operating cash flow stack up against its debt?

Over the past year, EVOL has ramped up its debt from US$6.00M to US$8.75M – this includes both the current and long-term debt. With this rise in debt, EVOL currently has US$7.56M remaining in cash and short-term investments , ready to deploy into the business. Moreover, EVOL has produced US$3.46M in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 39.53%, signalling that EVOL’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In EVOL’s case, it is able to generate 0.4x cash from its debt capital.

Can EVOL meet its short-term obligations with the cash in hand?

Looking at EVOL’s most recent US$16.60M liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.54x. For Software companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Can EVOL service its debt comfortably?

With debt at 25.42% of equity, EVOL may be thought of as appropriately levered. This range is considered safe as EVOL is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether EVOL 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 EVOL's, case, the ratio of 16.76x 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:

EVOL’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven't considered other factors such as how EVOL has been performing in the past. I suggest you continue to research Evolving Systems to get a better picture of the stock by looking at:

1. Valuation: What is EVOL 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 EVOL is currently mispriced by the market.
2. Historical Performance: What has EVOL'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.
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.