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While small-cap stocks, such as Premaitha Health PLC (AIM:NIPT) with its market cap of UK£12.85M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Medical Equipment companies, in particular ones that run negative earnings, are more likely to be higher risk. Assessing first and foremost the financial health is vital. I believe these basic checks tell most of the story you need to know. Nevertheless, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into NIPT here.
Does NIPT generate an acceptable amount of cash through operations?
NIPT’s debt levels surged from UK£1.36M to UK£4.43M over the last 12 months , which comprises of short- and long-term debt. With this increase in debt, NIPT currently has UK£1.30M remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, 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 examine some of NIPT’s operating efficiency ratios such as ROA here.
Does NIPT’s liquid assets cover its short-term commitments?
At the current liabilities level of UK£6.94M liabilities, it appears that the company has not been able to meet these commitments with a current assets level of UK£6.12M, leading to a 0.88x current account ratio. which is under the appropriate industry ratio of 3x.
Does NIPT face the risk of succumbing to its debt-load?
Since total debt levels have outpaced equities, NIPT is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since NIPT is currently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
With a high level of debt on its balance sheet, NIPT 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 NIPT to increase its operational efficiency. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for NIPT’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Premaitha Health to get a better picture of the stock by looking at:
1. Historical Performance: What has NIPT’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
2. 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 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.