Is Evolving Systems Inc's (NASDAQ:EVOL) Balance Sheet A Threat To Its Future?

Investors are always looking for growth in small-cap stocks like Evolving Systems Inc (NASDAQ:EVOL), with a market cap of US$32.11m. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Software industry, even ones that are profitable, are inclined towards being higher risk. So, understanding the company's financial health becomes crucial. I believe these basic checks tell most of the story you need to know. Though, since I only look at basic financial figures, I suggest you dig deeper yourself into EVOL here.

How much cash does EVOL generate through its operations?

Over the past year, EVOL has ramped up its debt from US$5.48m to US$8.23m , which is made up of current and long term debt. With this increase in debt, EVOL's cash and short-term investments stands at US$8.67m for investing into the business. Additionally, EVOL has generated cash from operations of US$5.00m over the same time period, leading to an operating cash to total debt ratio of 60.79%, indicating 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 0.61x cash from its debt capital.

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

At the current liabilities level of US$17.85m liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$26.92m, with a current ratio of 1.51x. For Software companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too capital in low return investments.

Does EVOL face the risk of succumbing to its debt-load?

With debt at 22.88% 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 13.66x 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 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I'm sure EVOL has company-specific issues impacting its capital structure decisions. You should continue to research Evolving Systems to get a more holistic view of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for EVOL’s future growth? Take a look at our free research report of analyst consensus for EVOL’s outlook.
2. 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.
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.

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 editorial-team@simplywallst.com.

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.