While small-cap stocks, such as Nuvectra Corporation (NASDAQ:NVTR) with its market cap of US$246m, 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 few basic financial health checks you should consider before taking the plunge. Nevertheless, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into NVTR here.
How much cash does NVTR generate through its operations?
Over the past year, NVTR has ramped up its debt from US$26m to US$44m – this includes long-term debt. With this increase in debt, NVTR currently has US$102m remaining in cash and short-term investments , ready to deploy 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. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of NVTR’s operating efficiency ratios such as ROA here.
Can NVTR meet its short-term obligations with the cash in hand?
At the current liabilities level of US$16m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 7.63x. However, a ratio greater than 3x may be considered high by some.
Is NVTR’s debt level acceptable?
With a debt-to-equity ratio of 42%, NVTR 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. But since NVTR is presently loss-making, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Although NVTR’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. Since there is also no concerns around NVTR’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how NVTR has been performing in the past. I suggest you continue to research Nuvectra to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for NVTR’s future growth? Take a look at our free research report of analyst consensus for NVTR’s outlook.
- Historical Performance: What has NVTR’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.
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