While small-cap stocks, such as Amedica Corporation (NASDAQ:AMDA) with its market cap of USD $10.18M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Why is it important? A major downturn in the energy industry has resulted in over 150 companies going bankrupt and has put more than 100 on the verge of a collapse, primarily due to excessive debt. Thus, it becomes utmost important for an investor to test a company’s resilience for such contingencies. In simple terms, I believe these three small calculations tell most of the story you need to know. View our latest analysis for Amedica
Does AMDA generate enough cash through operations?
While failure to manage cash has been one of the major reasons behind the demise of a lot of small businesses, mismanagement comes into the light during tough situations such as an economic recession. Furthermore, failure to service debt can hurt its reputation, making funding expensive in the future. We can test the impact of these adverse events by looking at whether cash from its current operations can pay back its current debt obligations. In the case of AMDA, operating cash flow turned out to be -2.07x its debt level over the past twelve months. This means what AMDA can generate on an annual basis, which is currently a negative value, does not cover what it actually owes its debtors in the near term. This raises a red flag, looking at AMDA’s operations at this point in time.
Can AMDA pay its short-term liabilities?
What about its other commitments such as payments to suppliers and salaries to its employees? In times of adverse events, AMDA may need to liquidate its short-term assets to pay these immediate obligations. We test for AMDA’s ability to meet these needs by comparing its cash and short-term investments with current liabilities. Our analysis shows that AMDA does not have enough liquid assets on hand to meet its upcoming liabilities. Though this is a common practice, since cash is better utilized invested in the business or returned to shareholders, it does raise some concerns for investors should adverse events arise.
Is AMDA’s level of debt at an acceptable level?
While ideally the debt-to equity ratio of a financially healthy company should be less than 40%, several factors such as industry life-cycle and economic conditions can result in a company raising a significant amount of debt. For AMDA, the debt-to-equity ratio is 28.25%, which means its debt level does not pose a threat to its operations right now.
Are you a shareholder? AMDA’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. In addition to this, the company may not be able to pay all of its upcoming liabilities from its current short-term assets. Given that AMDA’s financial situation may change. You should always be keeping abreast of market expectations for AMDA’s future growth on our free analysis platform.
Are you a potential investor? AMDA seems to have a sensible level of debt, meaning there’s some room to take on more debt if needed. But its current cash flow coverage of existing debt, in addition to the low liquidity, is concerning. Though, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of AMDA’s track record. You should continue your analysis by taking a look at AMDA’s past performance analysis on our free platform to conclude on AMDA’s financial health.
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.