While small-cap stocks, such as Model N Inc (NYSE:MODN) with its market cap of US$447m, 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. So, understanding the company’s financial health becomes crucial. Here are few basic financial health checks you should consider before taking the plunge. However, since I only look at basic financial figures, I suggest you dig deeper yourself into MODN here.
How does MODN’s operating cash flow stack up against its debt?
MODN has shrunken its total debt levels in the last twelve months, from US$57m to US$54m , which is made up of current and long term debt. With this debt repayment, MODN currently has US$57m remaining in cash and short-term investments , ready to deploy into the business. On top of this, MODN has produced cash from operations of US$3m over the same time period, resulting in an operating cash to total debt ratio of 4.7%, 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 positive earnings. In MODN’s case, it is able to generate 0.047x cash from its debt capital.
Does MODN’s liquid assets cover its short-term commitments?
At the current liabilities level of US$73m liabilities, the company has been able to meet these obligations given the level of current assets of US$89m, with a current ratio of 1.23x. For Software companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
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. 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 debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. 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. You should continue to research Model N to get a better picture of the stock by looking at:
- 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.
- 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.
- 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 editorial-team@simplywallst.com.