Obalon Therapeutics, Inc. (NASDAQ:OBLN) is a small-cap stock with a market capitalization of US$35m. 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? Companies operating in the Medical Equipment industry, in particular ones that run negative earnings, are more likely to be higher risk. So, understanding the company’s financial health becomes vital. I believe these basic checks tell most of the story you need to know. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into OBLN here.
How much cash does OBLN generate through its operations?
Over the past year, OBLN has maintained its debt levels at around US$9.9m – this includes long-term debt. At this constant level of debt, OBLN’s cash and short-term investments stands at US$30m , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of OBLN’s operating efficiency ratios such as ROA here.
Can OBLN pay its short-term liabilities?
Looking at OBLN’s US$7.3m in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$35m, leading to a 4.85x current account ratio. However, a ratio above 3x may be considered excessive by some investors.
Does OBLN face the risk of succumbing to its debt-load?
With debt reaching 49% of equity, OBLN may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since OBLN is presently unprofitable, sustainability of its current state of operations becomes a concern. 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 OBLN’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 OBLN has company-specific issues impacting its capital structure decisions. You should continue to research Obalon Therapeutics to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for OBLN’s future growth? Take a look at our free research report of analyst consensus for OBLN’s outlook.
- Historical Performance: What has OBLN’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.
To help readers see past 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.
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