Is MedReleaf Corp’s (TSE:LEAF) Balance Sheet A Threat To Its Future?
While small-cap stocks, such as MedReleaf Corp (TSX:LEAF) with its market cap of CA$1.52B, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Pharmaceuticals industry, in particular ones that run negative earnings, tend to be high risk. Assessing first and foremost the financial health is vital. I believe these basic checks tell most of the story you need to know. Nevertheless, this commentary is still very high-level, so I suggest you dig deeper yourself into LEAF here.
Does LEAF generate an acceptable amount of cash through operations?
LEAF has built up its total debt levels in the last twelve months, from CA$2.53M to CA$9.60M , which comprises of short- and long-term debt. With this rise in debt, LEAF currently has CA$12.90M remaining in cash and short-term investments for investing into the business. On top of this, LEAF has generated cash from operations of CA$12.19M during the same period of time, leading to an operating cash to total debt ratio of 126.93%, signalling that LEAF’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for loss making companies since metrics such as return on asset (ROA) requires positive earnings. In LEAF’s case, it is able to generate 1.27x cash from its debt capital.
Can LEAF pay its short-term liabilities?
With current liabilities at CA$11.85M, it seems that the business has been able to meet these obligations given the level of current assets of CA$36.55M, with a current ratio of 3.09x. Though, anything about 3x may be excessive, since LEAF may be leaving too much capital in low-earning investments.
Is LEAF’s debt level acceptable?
With debt at 4.86% of equity, LEAF may be thought of as having low leverage. This range is considered safe as LEAF is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. Investors’ risk associated with debt is virtually non-existent with LEAF, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Next Steps:
LEAF’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how LEAF has been performing in the past. I suggest you continue to research MedReleaf to get a more holistic view of the stock by looking at:
1. Future Outlook: What are well-informed industry analysts predicting for LEAF’s future growth? Take a look at our free research report of analyst consensus for LEAF’s outlook.
2. Valuation: What is LEAF 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 LEAF 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.
