Investors are always looking for growth in small-cap stocks like Sykes Enterprises Incorporated ( NASDAQ:SYKE ), with a market cap of US$1.2b. However, an important fact which most ignore is: how financially healthy is the business? IT companies, even ones that are profitable, are inclined towards being higher 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, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into SYKE here .
Does SYKE produce enough cash relative to debt?
Over the past year, SYKE has reduced its debt from US$267m to US$90m , which comprises of short- and long-term debt. With this debt repayment, the current cash and short-term investment levels stands at US$162m , ready to deploy into the business. On top of this, SYKE has generated US$111m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 123%, meaning that SYKE’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In SYKE’s case, it is able to generate 1.23x cash from its debt capital.
Can SYKE pay its short-term liabilities?
Looking at SYKE’s most recent US$191m liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$553m, with a current ratio of 2.9x. Usually, for IT companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Does SYKE face the risk of succumbing to its debt-load?
SYKE’s level of debt is appropriate relative to its total equity, at 11%. SYKE is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether SYKE 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 SYKE’s, case, the ratio of 14.78x suggests that interest is comfortably 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.
SYKE’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 proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure SYKE has company-specific issues impacting its capital structure decisions. You should continue to research Sykes Enterprises to get a more holistic view of the stock by looking at:
- Future Outlook : What are well-informed industry analysts predicting for SYKE’s future growth? Take a look at our free research report of analyst consensus for SYKE’s outlook.
- Valuation : What is SYKE 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 SYKE 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 email@example.com .