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Investors are always looking for growth in small-cap stocks like Horizon Therapeutics Public Limited Company (NASDAQ:HZNP), with a market cap of US$4.6b. However, an important fact which most ignore is: how financially healthy is the business? Understanding the company's financial health becomes crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, this is not a comprehensive overview, so I suggest you dig deeper yourself into HZNP here.
Does HZNP Produce Much Cash Relative To Its Debt?
Over the past year, HZNP has reduced its debt from US$1.9b to US$1.6b , which includes long-term debt. With this debt payback, HZNP's cash and short-term investments stands at US$1.0b to keep the business going. Additionally, HZNP has produced US$312m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 19%, meaning that HZNP’s debt is not covered by operating cash.
Can HZNP meet its short-term obligations with the cash in hand?
Looking at HZNP’s US$895m in current liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.74x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Pharmaceuticals companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can HZNP service its debt comfortably?
HZNP is a highly-leveraged company with debt exceeding equity by over 100%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if HZNP’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For HZNP, the ratio of 0.77x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
HZNP’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 HZNP'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 HZNP has been performing in the past. I suggest you continue to research Horizon Therapeutics to get a more holistic view of the small-cap by looking at:
- Valuation: What is HZNP 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 HZNP is currently mispriced by the market.
- Historical Performance: What has HZNP'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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.