Investors are always looking for growth in small-cap stocks like Natus Medical Incorporated (NASDAQ:BABY), with a market cap of US$1.1b. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Medical Equipment industry, especially ones that are currently loss-making, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is vital. Here are few basic financial health checks you should consider before taking the plunge. However, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into BABY here.
How much cash does BABY generate through its operations?
BABY has shrunken its total debt levels in the last twelve months, from US$154m to US$114m , which includes long-term debt. With this reduction in debt, BABY currently has US$54m remaining in cash and short-term investments for investing into the business. Additionally, BABY has generated US$24m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 21%, meaning that BABY’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency for unprofitable companies since metrics such as return on asset (ROA) requires positive earnings. In BABY’s case, it is able to generate 0.21x cash from its debt capital.
Can BABY pay its short-term liabilities?
At the current liabilities level of US$109m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.62x. Usually, for Medical Equipment 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.
Does BABY face the risk of succumbing to its debt-load?
BABY’s level of debt is appropriate relative to its total equity, at 28%. BABY is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. Risk around debt is very low for BABY, and the company also has the ability and headroom to increase debt if needed going forward.
BABY’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for BABY’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Natus Medical to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for BABY’s future growth? Take a look at our free research report of analyst consensus for BABY’s outlook.
- Valuation: What is BABY 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 BABY 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 firstname.lastname@example.org.