Pacira BioSciences, Inc. (NASDAQ:PCRX) is a small-cap stock with a market capitalization of US$1.8b. 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? Evaluating financial health as part of your investment thesis is essential, as mismanagement of capital can lead to 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, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into PCRX here.
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Does PCRX Produce Much Cash Relative To Its Debt?
Over the past year, PCRX has ramped up its debt from US$280m to US$329m , which includes long-term debt. With this rise in debt, PCRX currently has US$412m remaining in cash and short-term investments to keep the business going. Additionally, PCRX has produced cash from operations of US$55m over the same time period, resulting in an operating cash to total debt ratio of 17%, meaning that PCRX’s operating cash is less than its debt.
Can PCRX pay its short-term liabilities?
With current liabilities at US$59m, it seems that the business has been able to meet these commitments with a current assets level of US$509m, leading to a 8.62x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. However, a ratio greater than 3x may be considered by some to be quite high, however this is not necessarily a negative for the company.
Does PCRX face the risk of succumbing to its debt-load?
With total debt exceeding equity, PCRX is considered a highly levered company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can check to see whether PCRX is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In PCRX's, case, the ratio of 1.66x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
PCRX’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around PCRX's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure PCRX has company-specific issues impacting its capital structure decisions. I recommend you continue to research Pacira BioSciences to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PCRX’s future growth? Take a look at our free research report of analyst consensus for PCRX’s outlook.
- Valuation: What is PCRX 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 PCRX 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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