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Verint Systems Inc. (NASDAQ:VRNT) is a small-cap stock with a market capitalization of US$4.0b. 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? Assessing first and foremost the financial health is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company’s balance sheet strength. Nevertheless, this is just a partial view of the stock, and I suggest you dig deeper yourself into VRNT here.
VRNT’s Debt (And Cash Flows)
VRNT’s debt level has been constant at around US$789m over the previous year including long-term debt. At this stable level of debt, VRNT currently has US$404m remaining in cash and short-term investments , ready to be used for running the business. Additionally, VRNT has produced US$215m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 27%, meaning that VRNT’s operating cash is sufficient to cover its debt.
Can VRNT meet its short-term obligations with the cash in hand?
Looking at VRNT’s US$662m in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$1.0b, leading to a 1.52x 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 is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does VRNT face the risk of succumbing to its debt-load?
VRNT is a relatively highly levered company with a debt-to-equity of 63%. 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 VRNT’s case, the ratio of 3.67x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as VRNT’s high interest coverage is seen as responsible and safe practice.
VRNT’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. Since there is also no concerns around VRNT’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for VRNT’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Verint Systems to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for VRNT’s future growth? Take a look at our free research report of analyst consensus for VRNT’s outlook.
- Valuation: What is VRNT 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 VRNT 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 email@example.com. 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.