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Investors are always looking for growth in small-cap stocks like Cipher Pharmaceuticals Inc. (TSE:CPH), with a market cap of CA$34m. However, an important fact which most ignore is: how financially healthy is the business? Understanding the company's financial health becomes vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, this is not a comprehensive overview, so I’d encourage you to dig deeper yourself into CPH here.
CPH’s Debt (And Cash Flows)
Over the past year, CPH has maintained its debt levels at around US$18m which accounts for long term debt. At this constant level of debt, CPH's cash and short-term investments stands at US$10m , ready to be used for running the business. Additionally, CPH has generated US$8.1m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 46%, meaning that CPH’s debt is appropriately covered by operating cash.
Can CPH pay its short-term liabilities?
Looking at CPH’s US$21m in current liabilities, the company has been able to meet these obligations given the level of current assets of US$23m, with a current ratio of 1.08x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Pharmaceuticals companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can CPH service its debt comfortably?
With debt reaching 72% of equity, CPH may be thought of as relatively highly levered. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In CPH's case, the ratio of 8.34x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Although CPH’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 CPH has company-specific issues impacting its capital structure decisions. I recommend you continue to research Cipher Pharmaceuticals to get a better picture of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for CPH’s future growth? Take a look at our free research report of analyst consensus for CPH’s outlook.
Valuation: What is CPH 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 CPH is currently mispriced by the market.
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.
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