Digirad Corporation (NASDAQ:DRAD) is a small-cap stock with a market capitalization of US$36.21M. 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 Healthcare industry, especially ones that are currently loss-making, are more likely to be higher risk. So, understanding the company’s financial health becomes vital. 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 recommend you dig deeper yourself into DRAD here.
How does DRAD’s operating cash flow stack up against its debt?
DRAD has shrunken its total debt levels in the last twelve months, from US$22.07M to US$20.30M , which comprises of short- and long-term debt. With this debt repayment, DRAD’s cash and short-term investments stands at US$1.97M , ready to deploy into the business. Moreover, DRAD has produced cash from operations of US$6.19M over the same time period, leading to an operating cash to total debt ratio of 30.47%, signalling that DRAD’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for loss making companies since metrics such as return on asset (ROA) requires a positive net income. In DRAD’s case, it is able to generate 0.3x cash from its debt capital.
Does DRAD’s liquid assets cover its short-term commitments?
Looking at DRAD’s most recent US$16.97M liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.51x. Generally, for Healthcare companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Is DRAD’s debt level acceptable?
With debt reaching 42.03% of equity, DRAD may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since DRAD is currently loss-making, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Although DRAD’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around DRAD’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure DRAD has company-specific issues impacting its capital structure decisions. I suggest you continue to research Digirad to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for DRAD’s future growth? Take a look at our free research report of analyst consensus for DRAD’s outlook.
- Valuation: What is DRAD 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 DRAD is currently mispriced by the market.
- 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.