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While small-cap stocks, such as United Therapeutics Corporation (NASDAQ:UTHR) with its market cap of US$3.3b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that UTHR is not presently profitable, it’s essential to understand the current state of its operations and pathway to profitability. We'll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, these checks don't give you a full picture, so I’d encourage you to dig deeper yourself into UTHR here.
Does UTHR Produce Much Cash Relative To Its Debt?
Over the past year, UTHR has ramped up its debt from US$250m to US$1.1b , which includes long-term debt. With this rise in debt, UTHR's cash and short-term investments stands at US$1.6b to keep the business going. We note it produced negative cash flow over the last twelve months. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of UTHR’s operating efficiency ratios such as ROA here.
Does UTHR’s liquid assets cover its short-term commitments?
Looking at UTHR’s US$270m in current liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 7.19x. The current ratio is the number you get when you divide current assets by current liabilities. However, a ratio greater than 3x may be considered high by some.
Can UTHR service its debt comfortably?
With a debt-to-equity ratio of 45%, UTHR 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. But since UTHR 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.
UTHR’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 UTHR has company-specific issues impacting its capital structure decisions. You should continue to research United Therapeutics to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for UTHR’s future growth? Take a look at our free research report of analyst consensus for UTHR’s outlook.
- Valuation: What is UTHR 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 UTHR 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
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.