While small-cap stocks, such as Clinigen Group Plc (LON:CLIN) with its market cap of UK£1.3b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. 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 just a partial view of the stock, and I suggest you dig deeper yourself into CLIN here.
Does CLIN Produce Much Cash Relative To Its Debt?
Over the past year, CLIN has ramped up its debt from UK£189m to UK£248m , which includes long-term debt. With this rise in debt, CLIN currently has UK£55m remaining in cash and short-term investments to keep the business going. Moreover, CLIN has generated cash from operations of UK£47m during the same period of time, resulting in an operating cash to total debt ratio of 19%, meaning that CLIN’s operating cash is less than its debt.
Can CLIN meet its short-term obligations with the cash in hand?
At the current liabilities level of UK£115m, it seems that the business has been able to meet these obligations given the level of current assets of UK£178m, with a current ratio of 1.54x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Life Sciences companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can CLIN service its debt comfortably?
With a debt-to-equity ratio of 57%, CLIN can be considered as an above-average leveraged 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 test if CLIN’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 CLIN, the ratio of 7.62x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving CLIN ample headroom to grow its debt facilities.
Although CLIN’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 CLIN'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 CLIN has company-specific issues impacting its capital structure decisions. I recommend you continue to research Clinigen Group to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CLIN’s future growth? Take a look at our free research report of analyst consensus for CLIN’s outlook.
- Valuation: What is CLIN 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 CLIN 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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