Investors are always looking for growth in small-cap stocks like Digirad Corporation (NASDAQ:DRAD), with a market cap of US$30.2m. However, an important fact which most ignore is: how financially healthy is the business? Healthcare companies, especially ones that are currently loss-making, tend to be high risk. Evaluating financial health as part of your investment thesis is crucial. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into DRAD here.
How much cash does DRAD generate through its operations?
Over the past year, DRAD has reduced its debt from US$20.0m to US$12.5m , which is made up of current and long term debt. With this reduction in debt, the current cash and short-term investment levels stands at US$1.5m , ready to deploy into the business. Moreover, DRAD has produced cash from operations of US$5.7m in the last twelve months, resulting in an operating cash to total debt ratio of 45.9%, indicating that DRAD’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency for loss making companies since metrics such as return on asset (ROA) requires a positive net income. In DRAD’s case, it is able to generate 0.46x cash from its debt capital.
Does DRAD’s liquid assets cover its short-term commitments?
Looking at DRAD’s most recent US$13.6m 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 1.66x. Generally, for Healthcare companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Does DRAD face the risk of succumbing to its debt-load?
DRAD is a relatively highly levered company with a debt-to-equity of 42.2%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since DRAD is currently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
DRAD’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how DRAD has been performing in the past. I recommend you continue to research Digirad to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for DRAD’s future growth? Take a look at our free research report of analyst consensus for DRAD’s outlook.
- Valuation: What is DRAD 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 DRAD 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.