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Is Inovalon Holdings, Inc.'s (NASDAQ:INOV) Balance Sheet Strong Enough To Weather A Storm?

Simply Wall St

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Mid-caps stocks, like Inovalon Holdings, Inc. (NASDAQ:INOV) with a market capitalization of US$2.2b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. Today we will look at INOV’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Don’t forget that this is a general and concentrated examination of Inovalon Holdings’s financial health, so you should conduct further analysis into INOV here.

Check out our latest analysis for Inovalon Holdings

INOV’s Debt (And Cash Flows)

INOV's debt levels surged from US$242m to US$1.0b over the last 12 months , which includes long-term debt. With this increase in debt, INOV's cash and short-term investments stands at US$122m , ready to be used for running the business. Moreover, INOV has produced cash from operations of US$98m during the same period of time, resulting in an operating cash to total debt ratio of 9.6%, signalling that INOV’s operating cash is less than its debt.

Can INOV meet its short-term obligations with the cash in hand?

At the current liabilities level of US$141m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.89x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Healthcare Services companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

NasdaqGS:INOV Historical Debt, June 26th 2019

Is INOV’s debt level acceptable?

With total debt exceeding equity, INOV is considered a highly levered company. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. But since INOV is presently unprofitable, 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.

Next Steps:

Although INOV’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. I admit this is a fairly basic analysis for INOV's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Inovalon Holdings to get a more holistic view of the mid-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for INOV’s future growth? Take a look at our free research report of analyst consensus for INOV’s outlook.
  2. Valuation: What is INOV 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 INOV 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.

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 editorial-team@simplywallst.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.