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Investors are always looking for growth in small-cap stocks like Acadia Healthcare Company, Inc. (NASDAQ:ACHC), with a market cap of US$3.0b. However, an important fact which most ignore is: how financially healthy is the business? Since ACHC is loss-making right now, it’s essential to evaluate the current state of its operations and pathway to profitability. The following basic checks can help you get a picture of the company's balance sheet strength. However, this is just a partial view of the stock, and I’d encourage you to dig deeper yourself into ACHC here.
Does ACHC Produce Much Cash Relative To Its Debt?
ACHC's debt levels surged from US$3.2b to US$3.8b over the last 12 months , which includes long-term debt. With this increase in debt, the current cash and short-term investment levels stands at US$44m to keep the business going. On top of this, ACHC has generated cash from operations of US$385m in the last twelve months, leading to an operating cash to total debt ratio of 10%, indicating that ACHC’s debt is not covered by operating cash.
Can ACHC pay its short-term liabilities?
At the current liabilities level of US$425m, it appears that the company has been able to meet these obligations given the level of current assets of US$453m, with a current ratio of 1.07x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Healthcare companies, this is a reasonable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does ACHC face the risk of succumbing to its debt-load?
ACHC is a highly-leveraged company with debt exceeding equity by over 100%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. However, since ACHC is presently loss-making, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Although ACHC’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven't considered other factors such as how ACHC has been performing in the past. You should continue to research Acadia Healthcare Company to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ACHC’s future growth? Take a look at our free research report of analyst consensus for ACHC’s outlook.
- Valuation: What is ACHC 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 ACHC 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.