Aralez Pharmaceuticals Inc (TSX:ARZ) is a small-cap stock with a market capitalization of CAD CA$133.77M. 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. There are always disruptions which destabilize an existing industry, in which most small-cap companies are the first casualties. These factors make a basic understanding of a company’s financial position of utmost importance for a potential investor. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. View our latest analysis for Aralez Pharmaceuticals
Does ARZ generate enough cash through operations?
Unxpected adverse events, such as natural disasters and wars, can be a true test of a company’s capacity to meet its obligations. Furthermore, failure to service debt can hurt its reputation, making funding expensive in the future. 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. ARZ’s recent operating cash flow was -0.12 times its debt within the past year. This means what ARZ 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 ARZ’s operations at this point in time.
Can ARZ pay its short-term liabilities?
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, ARZ may need to liquidate its short-term assets to meet these upcoming payments. We test for ARZ’s ability to meet these needs by comparing its cash and short-term investments with current liabilities. Our analysis shows that ARZ does not have enough liquid assets on hand to meet its upcoming liabilities. Though this is a common practice, since cash is better utilized invested in the business or returned to shareholders, it does raise some concerns for investors should adverse events arise.
Is ARZ’s level of debt at an acceptable level?
A substantially higher debt poses a significant threat to a company’s profitability during a downturn. In the case of ARZ, the debt-to-equity ratio is over 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? With a high level of debt on its balance sheet, ARZ could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for ARZ to increase its operational efficiency. In addition to this, the company may struggle to meet its near term liabilities should an adverse event occur. Moving forward, its financial position may change. You should always be keeping on top of market expectations for ARZ’s future growth on our free analysis platform.
Are you a potential investor? ARZ’s large debt ratio on top of poor cash coverage in addition to low liquidity coverage of short-term expenses may not be what you’re after in an investment. However, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of ARZ’s track record. As a following step, you should take a look at ARZ’s past performance analysis on our free platform to figure out ARZ’s financial health position.
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.