ADMA Biologics Inc (NASDAQ:ADMA) is a small-cap stock with a market capitalization of USD $61.90M. 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? A major downturn in the energy industry has resulted in over 150 companies going bankrupt and has put more than 100 on the verge of a collapse, primarily due to excessive debt. Thus, it becomes utmost important for an investor to test a company’s resilience for such contingencies. In simple terms, I believe these three small calculations tell most of the story you need to know. View our latest analysis for ADMA Biologics
Does ADMA generate enough cash through operations?
There are many headwinds that come unannounced, such as natural disasters and political turmoil, which can challenge a small business and its ability to adapt and recover. These adverse events bring devastation and yet does not absolve the company from its debt. We can test the impact of these adverse events by looking at whether cash from its current operations can pay back its current debt obligations. In the case of ADMA, operating cash flow turned out to be -0.94x its debt level over the past twelve months. This means what ADMA can generate on an annual basis, which is currently a negative value, does not cover what it actually owes its debtors in the near term. This raises a red flag, looking at ADMA’s operations at this point in time.
Does ADMA’s liquid assets cover its short-term commitments?
What about its other commitments such as payments to suppliers and salaries to its employees? As cash flow from operation is hindered by adverse events, ADMA may need to liquidate its short-term assets to meet these upcoming payments. We should examine if the company’s cash and short-term investment levels match its current liabilities. Our analysis shows that ADMA does have enough liquid assets on hand to meet its upcoming liabilities, which lowers our concerns should adverse events arise.
Is ADMA’s level of debt at an acceptable level?
While ideally the debt-to equity ratio of a financially healthy company should be less than 40%, several factors such as industry life-cycle and economic conditions can result in a company raising a significant amount of debt. For ADMA, the debt-to-equity ratio stands at above 100%, which indicates that the company is holding a high level of debt relative to its net worth. In the event of financial turmoil, the company may experience difficulty meeting interest and other debt obligations.
Are you a shareholder? ADMA’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, its high liquidity means the company should continue to operate smoothly in the case of adverse events. Given that its financial position may change. You should always be keeping on top of market expectations for ADMA’s future growth on our free analysis platform.
Are you a potential investor? ADMA’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. You should continue your analysis by taking a look at ADMA’s past performance analysis on our free platform in order to determine for yourself whether its debt position is justified.
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.