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Apollo Endosurgery, Inc. (NASDAQ:APEN) is a small-cap stock with a market capitalization of US$69m. 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? Given that APEN is not presently profitable, it’s essential to understand the current state of its operations and pathway to profitability. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, these checks don't give you a full picture, so I recommend you dig deeper yourself into APEN here.
APEN’s Debt (And Cash Flows)
APEN has built up its total debt levels in the last twelve months, from US$33m to US$36m , which includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at US$30m to keep the business going. We note it produced negative cash flow over the last twelve months. For this article’s sake, I won’t be looking at this today, but you can take a look at some of APEN’s operating efficiency ratios such as ROA here.
Does APEN’s liquid assets cover its short-term commitments?
Looking at APEN’s US$20m 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 2.77x. The current ratio is calculated by dividing current assets by current liabilities. For Medical Equipment 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.
Is APEN’s debt level acceptable?
Since total debt levels exceed equity, APEN is a highly leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. But since APEN is presently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
APEN’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 APEN's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for APEN's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Apollo Endosurgery to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for APEN’s future growth? Take a look at our free research report of analyst consensus for APEN’s outlook.
- Valuation: What is APEN 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 APEN 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.