Is DURECT Corporation’s (NASDAQ:DRRX) Balance Sheet Strong Enough To Weather A Storm?
DURECT Corporation (NASDAQ:DRRX) is a small-cap stock with a market capitalization of US$179.8m. 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 Pharmaceuticals industry, especially ones that are currently loss-making, are inclined towards being higher risk. So, understanding the company’s financial health becomes essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into DRRX here.
How much cash does DRRX generate through its operations?
DRRX has sustained its debt level by about US$19.9m over the last 12 months made up of current and long term debt. At this current level of debt, DRRX’s cash and short-term investments stands at US$42.4m for investing 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 DRRX’s operating efficiency ratios such as ROA here.
Can DRRX meet its short-term obligations with the cash in hand?
At the current liabilities level of US$13.8m liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$49.8m, with a current ratio of 3.6x. Though, a ratio greater than 3x may be considered as too high, as DRRX could be holding too much capital in a low-return investment environment.
Is DRRX’s debt level acceptable?
With a debt-to-equity ratio of 70.3%, DRRX can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since DRRX 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.
Next Steps:
At its current level of cash flow coverage, DRRX has room for improvement to better cushion for events which may require debt repayment. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for DRRX’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research DURECT to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for DRRX’s future growth? Take a look at our free research report of analyst consensus for DRRX’s outlook.
Historical Performance: What has DRRX’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 editorial-team@simplywallst.com.
