Are Model N Inc’s (NYSE:MODN) Interest Costs Too High?

While small-cap stocks, such as Model N Inc (NYSE:MODN) with its market cap of US$529.70m, 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, especially ones that are currently loss-making, tend to be high risk. Assessing first and foremost the financial health is crucial. Here are few basic financial health checks you should consider before taking the plunge. Though, I know these factors are very high-level, so I suggest you dig deeper yourself into MODN here.

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

Over the past year, MODN has maintained its debt levels at around US$57.68m made up of current and long term debt. At this current level of debt, MODN currently has US$55.23m remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of MODN’s operating efficiency ratios such as ROA here.

Can MODN pay its short-term liabilities?

Looking at MODN’s most recent US$76.26m liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$91.53m, with a current ratio of 1.2x. 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.

NYSE:MODN Historical Debt June 29th 18
NYSE:MODN Historical Debt June 29th 18

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

With total debt exceeding equities, MODN is considered a highly levered company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since MODN is presently 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.

Next Steps:

At its current level of cash flow coverage, MODN has room for improvement to better cushion for events which may require debt repayment. However, 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 MODN has been performing in the past. You should continue to research Model N to get a better picture of the stock by looking at:

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