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Investors are always looking for growth in small-cap stocks like Tetraphase Pharmaceuticals, Inc. (NASDAQ:TTPH), with a market cap of US$40m. However, an important fact which most ignore is: how financially healthy is the business? Given that TTPH is not presently profitable, it’s crucial to evaluate the current state of its operations and pathway to profitability. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, this is not a comprehensive overview, so I’d encourage you to dig deeper yourself into TTPH here.
TTPH’s Debt (And Cash Flows)
TTPH has increased its debt level by about US$35m over the last 12 months accounting for long term debt. With this ramp up in debt, TTPH currently has US$88m remaining in cash and short-term investments , 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 TTPH’s operating efficiency ratios such as ROA here.
Can TTPH pay its short-term liabilities?
Looking at TTPH’s US$13m in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$97m, with a current ratio of 7.28x. The current ratio is calculated by dividing current assets by current liabilities. Having said that, many consider a ratio above 3x to be high.
Is TTPH’s debt level acceptable?
With a debt-to-equity ratio of 45%, TTPH can be considered as an above-average leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. However, since TTPH is currently 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.
TTPH’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. This is only a rough assessment of financial health, and I'm sure TTPH has company-specific issues impacting its capital structure decisions. I suggest you continue to research Tetraphase Pharmaceuticals to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TTPH’s future growth? Take a look at our free research report of analyst consensus for TTPH’s outlook.
- Historical Performance: What has TTPH'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.
- 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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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.