While small-cap stocks, such as Conformis, Inc. (NASDAQ:CFMS) with its market cap of US$32m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Medical Equipment industry, in particular ones that run negative earnings, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into CFMS here.
How much cash does CFMS generate through its operations?
Over the past year, CFMS has maintained its debt levels at around US$30m including long-term debt. At this constant level of debt, the current cash and short-term investment levels stands at US$37m , 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 assess some of CFMS’s operating efficiency ratios such as ROA here.
Can CFMS pay its short-term liabilities?
With current liabilities at US$12m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 5.71x. Having said that, a ratio greater than 3x may be considered high by some.
Does CFMS face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 68%, CFMS can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. However, since CFMS 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 CFMS’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. I admit this is a fairly basic analysis for CFMS’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Conformis to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CFMS’s future growth? Take a look at our free research report of analyst consensus for CFMS’s outlook.
- Historical Performance: What has CFMS’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.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.