Sonic Foundry Inc (NASDAQ:SOFO) is a small-cap stock with a market capitalization of US$6.5m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Software companies, especially ones that are currently loss-making, are more likely to be higher risk. Assessing first and foremost the financial health is vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into SOFO here.
Does SOFO produce enough cash relative to debt?
Over the past year, SOFO has ramped up its debt from US$4.1m to US$4.7m , which includes long-term debt. With this rise in debt, SOFO currently has US$2.1m remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can assess some of SOFO’s operating efficiency ratios such as ROA here.
Can SOFO pay its short-term liabilities?
With current liabilities at US$16m, it appears that the company may not be able to easily meet these obligations given the level of current assets of US$11m, with a current ratio of 0.71x.
Does SOFO face the risk of succumbing to its debt-load?
Since total debt levels have outpaced equities, SOFO is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since SOFO is currently unprofitable, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
SOFO’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. Though its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven’t considered other factors such as how SOFO has been performing in the past. You should continue to research Sonic Foundry to get a more holistic view of the stock by looking at:
- Valuation: What is SOFO 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 SOFO is currently mispriced by the market.
- Historical Performance: What has SOFO’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.
- 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 firstname.lastname@example.org.