While small-cap stocks, such as Inside Secure SA (EPA:INSD) with its market cap of €117.3m, 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 Semiconductor industry, even ones that are profitable, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into INSD here.
Does INSD produce enough cash relative to debt?
INSD’s debt levels surged from US$12.8m to US$18.2m over the last 12 months , which is made up of current and long term debt. With this growth in debt, INSD currently has US$49.1m remaining in cash and short-term investments for investing into the business. Moreover, INSD has generated cash from operations of US$10.1m in the last twelve months, resulting in an operating cash to total debt ratio of 55.6%, signalling that INSD’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In INSD’s case, it is able to generate 0.56x cash from its debt capital.
Can INSD meet its short-term obligations with the cash in hand?
Looking at INSD’s most recent US$13.9m liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 4.67x. However, a ratio greater than 3x may be considered as quite high, and some might argue INSD could be holding too much capital in a low-return investment environment.
Is INSD’s debt level acceptable?
With a debt-to-equity ratio of 26.4%, INSD’s debt level may be seen as prudent. This range is considered safe as INSD is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether INSD is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In INSD’s, case, the ratio of 4.23x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving INSD ample headroom to grow its debt facilities.
Next Steps:
INSD has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for INSD’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Inside Secure to get a better picture of the stock by looking at: