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Investors are always looking for growth in small-cap stocks like Digirad Corporation (NASDAQ:DRAD), with a market cap of US$14m. However, an important fact which most ignore is: how financially healthy is the business? Since DRAD is loss-making right now, it’s crucial 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. However, potential investors would need to take a closer look, and I recommend you dig deeper yourself into DRAD here.
Does DRAD Produce Much Cash Relative To Its Debt?
Over the past year, DRAD has ramped up its debt from US$13m to US$19m , which accounts for long term debt. With this increase in debt, the current cash and short-term investment levels stands at US$814k to keep the business going. On top of this, DRAD has generated US$2.5m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 13%, meaning that DRAD’s operating cash is less than its debt.
Can DRAD meet its short-term obligations with the cash in hand?
At the current liabilities level of US$13m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.59x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Healthcare companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can DRAD service its debt comfortably?
DRAD is a relatively highly levered company with a debt-to-equity of 62%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. However, since DRAD is currently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
DRAD’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. I admit this is a fairly basic analysis for DRAD's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Digirad to get a more holistic view of the small-cap by looking at:
- Historical Performance: What has DRAD'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.