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While small-cap stocks, such as Progress Software Corporation (NASDAQ:PRGS) with its market cap of US$1.7b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Software companies, even ones that are profitable, tend to be high risk. So, understanding the company’s financial health becomes vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, I know these factors are very high-level, so I recommend you dig deeper yourself into PRGS here.
Does PRGS produce enough cash relative to debt?
PRGS has sustained its debt level by about US$116m over the last 12 months including long-term debt. At this constant level of debt, PRGS’s cash and short-term investments stands at US$140m , ready to deploy into the business. Moreover, PRGS has produced US$121m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 105%, signalling that PRGS’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In PRGS’s case, it is able to generate 1.05x cash from its debt capital.
Does PRGS’s liquid assets cover its short-term commitments?
With current liabilities at US$196m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.17x. 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 PRGS face the risk of succumbing to its debt-load?
With debt at 37% of equity, PRGS may be thought of as appropriately levered. This range is considered safe as PRGS is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether PRGS 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 PRGS’s, case, the ratio of 24.21x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving PRGS ample headroom to grow its debt facilities.
PRGS’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. 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 PRGS has been performing in the past. I suggest you continue to research Progress Software to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PRGS’s future growth? Take a look at our free research report of analyst consensus for PRGS’s outlook.
- Valuation: What is PRGS 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 PRGS 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.
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