How Financially Strong Is Aralez Pharmaceuticals Inc (TSE:ARZ)?
Investors are always looking for growth in small-cap stocks like Aralez Pharmaceuticals Inc (TSX:ARZ), with a market cap of CA$139.12M. However, an important fact which most ignore is: how financially healthy is the business? Pharmaceuticals companies, especially ones that are currently loss-making, are inclined towards being higher risk. Assessing first and foremost the financial health is vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, this commentary is still very high-level, so I recommend you dig deeper yourself into ARZ here.
Does ARZ generate an acceptable amount of cash through operations?
ARZ has increased its debt level by about US$274.44M over the last 12 months comprising of short- and long-term debt. With this ramp up in debt, the current cash and short-term investment levels stands at US$64.94M for investing into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, 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 ARZ’s operating efficiency ratios such as ROA here.
Can ARZ meet its short-term obligations with the cash in hand?
With current liabilities at US$57.27M, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.61x. Usually, for Pharmaceuticals companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Can ARZ service its debt comfortably?
Since total debt levels have outpaced equities, ARZ is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since ARZ is presently 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:
ARZ’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how ARZ has been performing in the past. You should continue to research Aralez Pharmaceuticals to get a better picture of the stock by looking at:
1. Future Outlook: What are well-informed industry analysts predicting for ARZ’s future growth? Take a look at our free research report of analyst consensus for ARZ’s outlook.
2. Valuation: What is ARZ worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether ARZ is currently mispriced by the market.
3. 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 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.
