Investors are always looking for growth in small-cap stocks like Digirad Corporation (NASDAQ:DRAD), with a market cap of $48.13M. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the healthcare providers and services industry, in particular ones that run negative earnings, are inclined towards being higher risk. So, understanding the company’s financial health becomes crucial. I believe these basic checks tell most of the story you need to know. Nevertheless, I know these factors are very high-level, so I suggest you dig deeper yourself into DRAD here.
Does DRAD generate an acceptable amount of cash through operations?
DRAD has built up its total debt levels in the last twelve months, from $0.7M to $22.1M , which is made up of current and long term debt. With this increase in debt, the current cash and short-term investment levels stands at $2.2M for investing into the business. Moreover, DRAD has produced cash from operations of $10.8M over the same time period, leading to an operating cash to total debt ratio of 0.49x, indicating that DRAD’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for unprofitable companies since metrics such as return on asset (ROA) requires a positive net income. In DRAD’s case, it is able to generate 0.49x cash from its debt capital.
Can DRAD pay its short-term liabilities?
At the current liabilities level of $22.7M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of $27.1M, with a current ratio of 1.19x. For healthcare providers and services companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Can DRAD service its debt comfortably?
With a debt-to-equity ratio of 36.37%, DRAD’s debt level may be seen as prudent. DRAD is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. Investors’ risk associated with debt is very low with DRAD, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Are you a shareholder? DRAD’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. In the future, DRAD’s financial situation may change. I recommend keeping abreast of market expectations for DRAD’s future growth on our free analysis platform.
Are you a potential investor? DRAD’s relatively safe debt levels is even more impressive due to its ability to generate high cash flow, which illustrates operating efficiency. Furthermore, its high liquidity means the company should continue to operate smoothly in the case of adverse events. In order to build your confidence in the stock, you need to further examine the company’s track record. I encourage you to continue your research by taking a look at DRAD’s past performance analysis on our free platform in order to determine for yourself whether its debt position is justified.
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.