Is Model N, Inc.'s (NYSE:MODN) Balance Sheet A Threat To Its Future?

While small-cap stocks, such as Model N, Inc. (NYSE:MODN) with its market cap of US$544m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Software industry, in particular ones that run negative earnings, are more likely to be higher risk. Assessing first and foremost the financial health is crucial. I believe these basic checks tell most of the story you need to know. Nevertheless, I know these factors are very high-level, so I recommend you dig deeper yourself into MODN here.

How much cash does MODN generate through its operations?

Over the past year, MODN has reduced its debt from US$57m to US$54m , which includes long-term debt. With this debt payback, MODN currently has US$52m remaining in cash and short-term investments for investing into the business. Moreover, MODN has produced US$8.0m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 15%, indicating that MODN’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency for unprofitable companies since metrics such as return on asset (ROA) requires a positive net income. In MODN’s case, it is able to generate 0.15x cash from its debt capital.

Does MODN’s liquid assets cover its short-term commitments?

At the current liabilities level of US$60m, the company has been able to meet these commitments with a current assets level of US$84m, leading to a 1.42x current account ratio. For Software companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

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

Since total debt levels have outpaced equities, MODN 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 MODN is presently unprofitable, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.

Next Steps:

MODN’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven't considered other factors such as how MODN has been performing in the past. I recommend you continue to research Model N to get a better picture of the small-cap 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.

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