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Investors are always looking for growth in small-cap stocks like Vapotherm, Inc. (NYSE:VAPO), with a market cap of US$309m. However, an important fact which most ignore is: how financially healthy is the business? Since VAPO is loss-making right now, it’s vital to evaluate 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. Nevertheless, these checks don't give you a full picture, so I’d encourage you to dig deeper yourself into VAPO here.
VAPO’s Debt (And Cash Flows)
Over the past year, VAPO has ramped up its debt from US$22m to US$34m – this includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at US$58m , ready to be used for running the business. We note it produced negative cash flow over the last twelve months. For this article’s sake, I won’t be looking at this today, but you can assess some of VAPO’s operating efficiency ratios such as ROA here.
Can VAPO meet its short-term obligations with the cash in hand?
With current liabilities at US$14m, it appears that the company has been able to meet these commitments with a current assets level of US$82m, leading to a 5.82x 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 VAPO face the risk of succumbing to its debt-load?
VAPO is a relatively highly levered company with a debt-to-equity of 67%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. Though, since VAPO is presently 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.
Although VAPO’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 VAPO'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 VAPO has company-specific issues impacting its capital structure decisions. You should continue to research Vapotherm to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for VAPO’s future growth? Take a look at our free research report of analyst consensus for VAPO’s outlook.
- Historical Performance: What has VAPO's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.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.