Yahoo Finance Are Monotype Imaging Holdings Inc.’s (NASDAQ:TYPE) Interest Costs Too High?
Monotype Imaging Holdings Inc. (NASDAQ:TYPE) is a small-cap stock with a market capitalization of US$634m. 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? Companies operating in the Software industry, even ones that are profitable, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is essential. Here are few basic financial health checks you should consider before taking the plunge. Though, this commentary is still very high-level, so I recommend you dig deeper yourself into TYPE here.
How does TYPE’s operating cash flow stack up against its debt?
TYPE has shrunken its total debt levels in the last twelve months, from US$96m to US$80m , which also accounts for long term debt. With this debt payback, TYPE currently has US$70m remaining in cash and short-term investments , ready to deploy into the business. On top of this, TYPE has generated US$23m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 28%, signalling that TYPE’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In TYPE’s case, it is able to generate 0.28x cash from its debt capital.
Can TYPE meet its short-term obligations with the cash in hand?
Looking at TYPE’s US$47m in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$124m, with a current ratio of 2.62x. Usually, for Software companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Can TYPE service its debt comfortably?
With a debt-to-equity ratio of 24%, TYPE’s debt level may be seen as prudent. TYPE is not taking on too much debt commitment, which may be constraining for future growth. We can test if TYPE’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 TYPE, the ratio of 7.86x 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:
TYPE’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for TYPE’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Monotype Imaging Holdings to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for TYPE’s future growth? Take a look at our free research report of analyst consensus for TYPE’s outlook.
Valuation: What is TYPE 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 TYPE 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 editorial-team@simplywallst.com.
