Inphi Corporation (NYSE:IPHI) is a small-cap stock with a market capitalization of US$1.9b. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Given that IPHI is not presently profitable, it’s vital to assess the current state of its operations and pathway to profitability. The following basic checks can help you get a picture of the company’s balance sheet strength. However, these checks don’t give you a full picture, so I’d encourage you to dig deeper yourself into IPHI here.
IPHI’s Debt (And Cash Flows)
IPHI has built up its total debt levels in the last twelve months, from US$421m to US$448m , which accounts for long term debt. With this growth in debt, IPHI currently has US$407m remaining in cash and short-term investments to keep the business going. On top of this, IPHI has generated cash from operations of US$78m during the same period of time, resulting in an operating cash to total debt ratio of 17%, meaning that IPHI’s debt is not covered by operating cash.
Can IPHI pay its short-term liabilities?
Looking at IPHI’s US$64m in current liabilities, the company has been able to meet these commitments with a current assets level of US$511m, leading to a 7.93x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Having said that, a ratio above 3x may be considered excessive by some investors.
Does IPHI face the risk of succumbing to its debt-load?
Since total debt levels exceed equity, IPHI is a highly leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. Though, since IPHI is currently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
IPHI’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. Since there is also no concerns around IPHI’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure IPHI has company-specific issues impacting its capital structure decisions. You should continue to research Inphi to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for IPHI’s future growth? Take a look at our free research report of analyst consensus for IPHI’s outlook.
- Valuation: What is IPHI 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 IPHI 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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