A Member of Pat McKeough’s Inner Circle recently asked for his advice on a company that develops enterprise-information-management software for corporate clients and their corporate intranet and extranet networks.

Open Text’s revenue and earnings are up 22.9% and 26.7% respectively. Pat also points to its strong cash position and manageable debt. That solid balance sheet helped the company make a new acquisition that opens the door to profitable health-care contracts. Still, cautions Pat, that purchase adds risk.

Q: Pat, what do you think of Open Text? Thanks.

A: Open Text, $45.13, symbol OTEX on Toronto (Shares outstanding: 263.1 million; Market cap: $12.3 billion; www.opentext.com), develops, markets, licenses and supports collaboration and enterprise-information-management software for corporate clients. That software stores, finds, and distributes information across corporate intranet and extranet networks as well as the broader Internet.

For its fiscal year ended June 30, 2018, Open Text’s revenue rose 22.9%, to $2.8 billion from $2.3 billion in fiscal 2017. (All figures except share price and market cap in U.S. dollars.) Excluding one-time items, earnings per share rose 26.7%, to $2.56 from $2.02.

The company’s revenues and profits have risen steadily over the last five years: in fiscal 2013, revenue was just $1.4 billion and earnings per share were $1.39 (adjusted for two 2-for-1 splits).

In the first quarter ended September 30, 2018, the company’s revenue increased 4.1%, to $667.2 million from $640.7 million a year earlier. Excluding one-time items, earnings per share rose 11.1%, to $0.60 from $0.54.

The company’s balance sheet is sound, with cash of $787.9 million, or $2.99 a share. Open Text’s long-term debt of $2.6 billion U.S. is a manageable 28% of the company’s market cap. It spends a high 12% of its revenue on research.

Growth Stocks: Recent acquisition allows expansion into the healthcare market

Open Text continues to grow by acquisition. On October 31, 2018, the company agreed to buy Georgia-based cloud enterprise company Liaison for $310 million. Liaison’s flagship products are aimed at the health-care industry, and are focused on integrating data from research, claims, clinical trials, and financial, risk and operational areas. As a cloud-based provider, it uses remote servers to let customers store and access their files over the Internet.

With offices in the U.S., the Netherlands, Finland, Sweden, the United Kingdom, Singapore and 40 other countries, Liaison has over 7,000 customers.

Open Text’s growth-by-acquisition strategy adds risk. As well, the company operates in a very competitive market.

The stock trades at 12.6 times the $2.71 U.S. a share Open Text is forecast to earn for the fiscal year ending June 30, 2019. The company’s shares yield 1.8%.

Recommendation in Inner Circle: Open Text is okay to hold, but only for aggressive investors.