Quotient Technology Inc (NYSE:QUOT) is a small-cap stock with a market capitalization of US$1.47b. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Online Retail businesses operating in the environment facing headwinds from current disruption, in particular ones that run negative earnings, are more likely to be 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, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into QUOT here.
Does QUOT produce enough cash relative to debt?
QUOT has increased its debt level by about US$150.7m over the last 12 months – this includes both the current and long-term debt. With this ramp up in debt, the current cash and short-term investment levels stands at US$358.0m for investing into the business. Moreover, QUOT has produced cash from operations of US$37.0m during the same period of time, resulting in an operating cash to total debt ratio of 24.6%, meaning that QUOT’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for loss making companies since metrics such as return on asset (ROA) requires positive earnings. In QUOT’s case, it is able to generate 0.25x cash from its debt capital.
Can QUOT meet its short-term obligations with the cash in hand?
Looking at QUOT’s most recent US$88.0m liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$463.9m, leading to a 5.28x current account ratio. However, anything above 3x may be considered excessive by some investors. They might argue QUOT is leaving too much capital in low-earning investments.
Can QUOT service its debt comfortably?
With debt at 38.7% of equity, QUOT may be thought of as appropriately levered. QUOT is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. QUOT’s risk around capital structure is low, and the company has the headroom and ability to raise debt should it need to in the future.
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Although QUOT’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how QUOT has been performing in the past. I recommend you continue to research Quotient Technology to get a more holistic view of the stock by looking at: