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While small-cap stocks, such as Lipocine Inc. (NASDAQ:LPCN) with its market cap of US$32m, 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 LPCN is not presently profitable, it’s crucial to assess 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, this is not a comprehensive overview, so I suggest you dig deeper yourself into LPCN here.
Does LPCN Produce Much Cash Relative To Its Debt?
Over the past year, LPCN has reduced its debt from US$10m to US$9.5m – this includes long-term debt. With this debt repayment, LPCN's cash and short-term investments stands at US$18m , ready to be used for running the business. 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 LPCN’s operating efficiency ratios such as ROA here.
Can LPCN pay its short-term liabilities?
At the current liabilities level of US$4.3m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 5.37x. The current ratio is calculated by dividing current assets by current liabilities. However, many consider a ratio above 3x to be high.
Does LPCN face the risk of succumbing to its debt-load?
With debt reaching 76% of equity, LPCN may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. Though, since LPCN is presently unprofitable, 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.
LPCN’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 LPCN has company-specific issues impacting its capital structure decisions. I suggest you continue to research Lipocine to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for LPCN’s future growth? Take a look at our free research report of analyst consensus for LPCN’s outlook.
- Historical Performance: What has LPCN'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.
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.