AMAG Pharmaceuticals, Inc. (NASDAQ:AMAG) is a small-cap stock with a market capitalization of US$349m. 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? Since AMAG is loss-making right now, it’s essential to understand the current state of its operations and pathway to profitability. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, these checks don't give you a full picture, so I recommend you dig deeper yourself into AMAG here.
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AMAG’s Debt (And Cash Flows)
Over the past year, AMAG has reduced its debt from US$739m to US$273m , which includes long-term debt. With this reduction in debt, AMAG's cash and short-term investments stands at US$267m , ready to be used for running the business. Moving on, operating cash flow was negative over the last twelve months. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of AMAG’s operating efficiency ratios such as ROA here.
Does AMAG’s liquid assets cover its short-term commitments?
At the current liabilities level of US$183m, it appears that the company has been able to meet these obligations given the level of current assets of US$420m, with a current ratio of 2.3x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Biotechs companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can AMAG service its debt comfortably?
AMAG is a relatively highly levered company with a debt-to-equity of 44%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. Though, since AMAG is currently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
AMAG’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for AMAG's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research AMAG Pharmaceuticals to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AMAG’s future growth? Take a look at our free research report of analyst consensus for AMAG’s outlook.
- Valuation: What is AMAG 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 AMAG 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.
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