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While small-cap stocks, such as Cerus Corporation (NASDAQ:CERS) with its market cap of US$744m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since CERS is loss-making right now, it’s essential to assess the current state of its operations and pathway to profitability. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, this is just a partial view of the stock, and I’d encourage you to dig deeper yourself into CERS here.
Does CERS Produce Much Cash Relative To Its Debt?
CERS's debt levels surged from US$30m to US$60m over the last 12 months , which includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at US$100m , ready to be used for running the business. Its negative operating cash flow means calculating cash-to-debt wouldn't be useful. 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 CERS’s operating efficiency ratios such as ROA here.
Can CERS pay its short-term liabilities?
Looking at CERS’s US$48m in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.83x. The current ratio is the number you get when you divide current assets by current liabilities. For Medical Equipment companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is CERS’s debt level acceptable?
With a debt-to-equity ratio of 57%, CERS can be considered as an above-average leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. But since CERS is presently unprofitable, 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.
CERS’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. Keep in mind I haven't considered other factors such as how CERS has been performing in the past. I recommend you continue to research Cerus to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CERS’s future growth? Take a look at our free research report of analyst consensus for CERS’s outlook.
- Historical Performance: What has CERS'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.
- 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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If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.