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

Investors are always looking for growth in small-cap stocks like Model N Inc (NYSE:MODN), with a market cap of US$518.90M. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Software industry, especially ones that are currently loss-making, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is crucial. Here are few basic financial health checks you should consider before taking the plunge. Though, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into MODN here.

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

Over the past year, MODN has borrowed debt capital of around US$57.21M comprising of short- and long-term debt. With this increase in debt, MODN’s cash and short-term investments stands at US$57.56M for investing into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can take a look at some of MODN’s operating efficiency ratios such as ROA here.

Can MODN meet its short-term obligations with the cash in hand?

With current liabilities at US$76.92M, it seems that the business has been able to meet these obligations given the level of current assets of US$87.09M, with a current ratio of 1.13x. Usually, for Software companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

NYSE:MODN Historical Debt Apr 13th 18
NYSE:MODN Historical Debt Apr 13th 18

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. However, since MODN is currently loss-making, 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. Though, the company exhibits an ability to meet its near term obligations should an adverse event occur. 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 more holistic view of the stock by looking at: