Axsome Therapeutics Inc (NASDAQ:AXSM) is a small-cap stock with a market capitalization of US$67.44M. 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? Pharmaceuticals companies, especially ones that are currently loss-making, tend to be high risk. Evaluating financial health as part of your investment thesis is vital. Here are few basic financial health checks you should consider before taking the plunge. However, I know these factors are very high-level, so I recommend you dig deeper yourself into AXSM here.
Does AXSM generate enough cash through operations?
In the previous 12 months, AXSM’s rose by about US$9.74M made up of current and long term debt. With this increase in debt, AXSM currently has US$36.62M remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of AXSM’s operating efficiency ratios such as ROA here.
Does AXSM’s liquid assets cover its short-term commitments?
At the current liabilities level of US$7.17M liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$38.00M, leading to a 5.3x current account ratio. However, anything above 3x is considered high and could mean that AXSM has too much idle capital in low-earning investments.
Does AXSM face the risk of succumbing to its debt-load?
With debt reaching 59.94% of equity, AXSM may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since AXSM is currently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
AXSM’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, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how AXSM has been performing in the past. You should continue to research Axsome Therapeutics to get a better picture of the stock by looking at:
- 1. Future Outlook: What are well-informed industry analysts predicting for AXSM’s future growth? Take a look at our free research report of analyst consensus for AXSM’s outlook.
- 2. Historical Performance: What has AXSM’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 3. 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.
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.