Investors are always looking for growth in small-cap stocks like Novelion Therapeutics Inc (NASDAQ:NVLN), with a market cap of USD $70.32M. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the biotechnology industry, in particular ones that run negative earnings, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is essential. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into NVLN here.
Does NVLN generate an acceptable amount of cash through operations?
NVLN has increased its debt level by about $226M over the last 12 months comprising of short- and long-term debt. With this increase in debt, NVLN’s cash and short-term investments stands at $109M for investing into the business. However, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can take a look at some of NVLN’s operating efficiency ratios such as ROA here.
Can NVLN pay its short-term liabilities?
With current liabilities at $119M liabilities, it appears that the company has been able to meet these commitments with a current assets level of $166M, leading to a 1.4x current account ratio. Generally, for biotechnology companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Is NVLN’s level of debt at an acceptable level?
With total debt exceeding equities, NVLN is considered a highly levered company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since NVLN is presently 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.
Are you a shareholder? NVLN’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. Given that its financial position may change. You should always be keeping on top of market expectations for NVLN’s future growth on our free analysis platform.
Are you a potential investor? With a high level of debt on its balance sheet, NVLN could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for NVLN to increase its operational efficiency. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. As a following step, you should take a look at NVLN’s past performance analysis on our free platform to conclude on NVLN’s financial health.
To help readers see pass 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.