You Might Like Theratechnologies Inc. (TSE:TH) But Do You Like Its Debt?
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Investors are always looking for growth in small-cap stocks like Theratechnologies Inc. (TSE:TH), with a market cap of CA$552m. However, an important fact which most ignore is: how financially healthy is the business? Given that TH is not presently profitable, it’s essential to understand the current state of its operations and pathway to profitability. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, potential investors would need to take a closer look, and I recommend you dig deeper yourself into TH here.
Does TH Produce Much Cash Relative To Its Debt?
In the previous 12 months, TH's rose by about US$50m including long-term debt. With this increase in debt, the current cash and short-term investment levels stands at US$50m , ready to be used for running the business. Moreover, TH has produced cash from operations of US$2.3m during the same period of time, leading to an operating cash to total debt ratio of 4.6%, indicating that TH’s current level of operating cash is not high enough to cover debt.
Can TH meet its short-term obligations with the cash in hand?
At the current liabilities level of US$29m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.46x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Biotechs companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does TH face the risk of succumbing to its debt-load?
TH is a highly-leveraged company with debt exceeding equity by over 100%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. But since TH is presently loss-making, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
Although TH’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. Since there is also no concerns around TH's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how TH has been performing in the past. You should continue to research Theratechnologies to get a more holistic view of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for TH’s future growth? Take a look at our free research report of analyst consensus for TH’s outlook.
Valuation: What is TH 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 TH 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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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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.
