Is CanniMed Therapeutics Inc’s (TSE:CMED) Balance Sheet A Threat To Its Future?
CanniMed Therapeutics Inc (TSX:CMED) is a small-cap stock with a market capitalization of CA$938.77M. 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. Why is it important? Companies operating in the Pharmaceuticals industry, in particular ones that run negative earnings, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into CMED here.
Does CMED generate enough cash through operations?
CMED’s debt levels have fallen from CA$30.01M to CA$13.88M over the last 12 months – this includes both the current and long-term debt. With this debt repayment, CMED’s cash and short-term investments stands at CA$48.38M for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can take a look at some of CMED’s operating efficiency ratios such as ROA here.
Can CMED meet its short-term obligations with the cash in hand?
At the current liabilities level of CA$5.76M liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 10.42x. However, a ratio greater than 3x may be considered as too high, as CMED could be holding too much capital in a low-return investment environment.
Is CMED’s debt level acceptable?
With debt at 15.56% of equity, CMED may be thought of as appropriately levered. CMED is not taking on too much debt commitment, which may be constraining for future growth. Investors’ risk associated with debt is very low with CMED, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Next Steps:
CMED’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for CMED’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research CanniMed Therapeutics to get a more holistic view of the stock by looking at:
1. Valuation: What is CMED 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 CMED is currently mispriced by the market.
2. Historical Performance: What has CMED’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.
