Investors are always looking for growth in small-cap stocks like Emergent BioSolutions Inc. (NYSE:EBS), with a market cap of US$2.2b. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, this is just a partial view of the stock, and I suggest you dig deeper yourself into EBS here.
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Does EBS Produce Much Cash Relative To Its Debt?
Over the past year, EBS has ramped up its debt from US$13m to US$756m – this includes long-term debt. With this rise in debt, EBS currently has US$137m remaining in cash and short-term investments to keep the business going. Moreover, EBS has produced US$148m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 20%, signalling that EBS’s debt is not covered by operating cash.
Can EBS pay its short-term liabilities?
With current liabilities at US$248m, the company has been able to meet these commitments with a current assets level of US$529m, leading to a 2.13x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. For Biotechs companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can EBS service its debt comfortably?
EBS is a relatively highly levered company with a debt-to-equity of 77%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether EBS is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In EBS's, case, the ratio of 4.81x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving EBS ample headroom to grow its debt facilities.
Although EBS’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. 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 EBS has company-specific issues impacting its capital structure decisions. I recommend you continue to research Emergent BioSolutions to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for EBS’s future growth? Take a look at our free research report of analyst consensus for EBS’s outlook.
- Valuation: What is EBS 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 EBS 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.
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