Apollo Endosurgery, Inc. (NASDAQ:APEN) is a small-cap stock with a market capitalization of US$77m. 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? Medical Equipment companies, in particular ones that run negative earnings, are inclined towards being higher risk. So, understanding the company’s financial health becomes crucial. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, I know these factors are very high-level, so I suggest you dig deeper yourself into APEN here.
Does APEN produce enough cash relative to debt?
Over the past year, APEN has reduced its debt from US$33m to US$31m , which includes long-term debt. With this debt repayment, APEN’s cash and short-term investments stands at US$28m , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can examine some of APEN’s operating efficiency ratios such as ROA here.
Can APEN meet its short-term obligations with the cash in hand?
With current liabilities at US$22m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.42x. 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.
Can APEN service its debt comfortably?
APEN is a relatively highly levered company with a debt-to-equity of 67%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since APEN is currently unprofitable, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Although APEN’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure APEN has company-specific issues impacting its capital structure decisions. I recommend you continue to research Apollo Endosurgery to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for APEN’s future growth? Take a look at our free research report of analyst consensus for APEN’s outlook.
- Historical Performance: What has APEN’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.
To help readers see past 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.
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