Is Medpace Holdings Inc’s (NASDAQ:MEDP) Balance Sheet Strong Enough To Weather A Storm?
Investors are always looking for growth in small-cap stocks like Medpace Holdings Inc (NASDAQ:MEDP), with a market cap of US$1.35B. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Life Sciences industry, even ones that are profitable, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is essential. I believe these basic checks tell most of the story you need to know. Nevertheless, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into MEDP here.
Does MEDP generate an acceptable amount of cash through operations?
Over the past year, MEDP has reduced its debt from US$409.81M to US$193.87M – this includes both the current and long-term debt. With this reduction in debt, MEDP currently has US$37.10M remaining in cash and short-term investments , ready to deploy into the business. Additionally, MEDP has generated US$91.73M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 47.32%, indicating that MEDP’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In MEDP’s case, it is able to generate 0.47x cash from its debt capital.
Can MEDP meet its short-term obligations with the cash in hand?
With current liabilities at US$168.60M, it seems that the business is not able to meet these obligations given the level of current assets of US$133.25M, with a current ratio of 0.79x below the prudent level of 3x.
Does MEDP face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 38.48%, MEDP’s debt level may be seen as prudent. MEDP is not taking on too much debt commitment, which may be constraining for future growth. We can test if MEDP’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For MEDP, the ratio of 7.47x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving MEDP ample headroom to grow its debt facilities.
Next Steps:
MEDP has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. But, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for MEDP’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Medpace Holdings to get a better picture of the stock by looking at:
1. Future Outlook: What are well-informed industry analysts predicting for MEDP’s future growth? Take a look at our free research report of analyst consensus for MEDP’s outlook.
2. Valuation: What is MEDP 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 MEDP is currently mispriced by the market.
3. 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.
