Investors are always looking for growth in small-cap stocks like NovoCure Limited (NASDAQ:NVCR), with a market cap of US$4.4b. However, an important fact which most ignore is: how financially healthy is the business? Given that NVCR is not presently profitable, it’s crucial to evaluate the current state of its operations and pathway to profitability. The following basic checks can help you get a picture of the company's balance sheet strength. However, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into NVCR here.
NVCR’s Debt (And Cash Flows)
NVCR's debt levels surged from US$97m to US$149m over the last 12 months , which includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at US$246m , ready to be used for running the business. Moving on, operating cash flow was negative over the last twelve months. For this article’s sake, I won’t be looking at this today, but you can take a look at some of NVCR’s operating efficiency ratios such as ROA here.
Can NVCR pay its short-term liabilities?
At the current liabilities level of US$65m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 4.98x. The current ratio is the number you get when you divide current assets by current liabilities. Having said that, many consider a ratio above 3x to be high.
Can NVCR service its debt comfortably?
Since total debt levels exceed equity, NVCR is a highly leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. Though, since NVCR is presently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
NVCR’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. I admit this is a fairly basic analysis for NVCR's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research NovoCure to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for NVCR’s future growth? Take a look at our free research report of analyst consensus for NVCR’s outlook.
- Valuation: What is NVCR 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 NVCR 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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