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While small-cap stocks, such as Inovalon Holdings, Inc. (NASDAQ:INOV) with its market cap of US$2.1b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since INOV is loss-making right now, it’s crucial to understand the current state of its operations and pathway to profitability. 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 recommend you dig deeper yourself into INOV here.
Does INOV Produce Much Cash Relative To Its Debt?
INOV's debt levels surged from US$242m to US$1.0b over the last 12 months , which accounts for long term debt. With this rise in debt, INOV's cash and short-term investments stands at US$122m , ready to be used for running the business. On top of this, INOV has produced US$98m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 9.6%, signalling that INOV’s current level of operating cash is not high enough to cover debt.
Does INOV’s liquid assets cover its short-term commitments?
Looking at INOV’s US$141m in current liabilities, the company has been able to meet these commitments with a current assets level of US$267m, leading to a 1.89x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. For Healthcare Services companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can INOV service its debt comfortably?
With total debt exceeding equity, INOV is considered a highly levered company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. Though, since INOV is currently loss-making, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
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. Since there is also no concerns around INOV'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 INOV has company-specific issues impacting its capital structure decisions. You should continue to research Inovalon Holdings to get a better picture of the small-cap by looking at:
- 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.
- 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.
- 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 firstname.lastname@example.org. 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.