Neurosoft Software Production SA. (BIT:NRST) is a small-cap stock with a market capitalization of €58.84M. 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? Software companies, especially ones that are currently loss-making, tend to be high risk. Assessing first and foremost the financial health is essential. Here are few basic financial health checks you should consider before taking the plunge. Though, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into NRST here.

Does NRST generate enough cash through operations?

NRST’s debt levels have fallen from €855.30K to €755.88K over the last 12 months , which is made up of current and long term debt. With this reduction in debt, the current cash and short-term investment levels stands at €2.50M for investing into the business. Additionally, NRST has generated €2.62M in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 346.54%, signalling that NRST’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency for unprofitable businesses as traditional metrics such as return on asset (ROA) requires a positive net income. In NRST’s case, it is able to generate 3.47x cash from its debt capital.

Does NRST’s liquid assets cover its short-term commitments?

Looking at NRST’s most recent €2.04M liabilities, it seems that the business has been able to meet these commitments with a current assets level of €6.98M, leading to a 3.42x current account ratio. However, a ratio greater than 3x may be considered as too high, as NRST could be holding too much capital in a low-return investment environment.

Can NRST service its debt comfortably?

With debt at 8.82% of equity, NRST may be thought of as having low leverage. This range is considered safe as NRST is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. Investors’ risk associated with debt is virtually non-existent with NRST, and the company has plenty of headroom and ability to raise debt should it need to in the future.

Next Steps:

NRST’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. This is only a rough assessment of financial health, and I’m sure NRST has company-specific issues impacting its capital structure decisions. I suggest you continue to research Neurosoft Software Production to get a more holistic view of the stock by looking at:

1. Historical Performance: What has NRST’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.

2. 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 pass 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.