In This Article:
Investors are always looking for growth in small-cap stocks like Learning Technologies Group plc (LON:LTG), with a market cap of UK£865.5m. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Software industry, even ones that are profitable, 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’d encourage you to dig deeper yourself into LTG here.
How much cash does LTG generate through its operations?
LTG has built up its total debt levels in the last twelve months, from UK£13.8m to UK£14.6m – this includes both the current and long-term debt. With this increase in debt, LTG currently has UK£15.7m remaining in cash and short-term investments , ready to deploy into the business. Additionally, LTG has generated UK£10.8m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 73.9%, signalling that LTG’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In LTG’s case, it is able to generate 0.74x cash from its debt capital.
Does LTG’s liquid assets cover its short-term commitments?
Looking at LTG’s most recent UK£25.7m liabilities, it appears that the company has been able to meet these obligations given the level of current assets of UK£34.3m, with a current ratio of 1.34x. Usually, for Software companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Can LTG service its debt comfortably?
LTG’s level of debt is appropriate relative to its total equity, at 19.0%. LTG is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if LTG’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For LTG, the ratio of 9.39x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Next Steps:
LTG’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. 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 LTG’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Learning Technologies Group to get a more holistic view of the stock by looking at: