While small-cap stocks, such as Neuronetics, Inc. (NASDAQ:STIM) with its market cap of US$282m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that STIM is not presently profitable, it’s crucial to assess the current state of its operations and pathway to profitability. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, these checks don't give you a full picture, so I’d encourage you to dig deeper yourself into STIM here.
STIM’s Debt (And Cash Flows)
STIM's debt level has been constant at around US$30m over the previous year including long-term debt. At this stable level of debt, STIM's cash and short-term investments stands at US$105m to keep the business going. We note it produced negative cash flow over the last twelve months. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of STIM’s operating efficiency ratios such as ROA here.
Can STIM meet its short-term obligations with the cash in hand?
At the current liabilities level of US$14m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 8.44x. The current ratio is the number you get when you divide current assets by current liabilities. However, a ratio above 3x may be considered excessive by some investors.
Is STIM’s debt level acceptable?
With debt reaching 43% of equity, STIM may be thought of as relatively highly levered. 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 STIM is presently loss-making, 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.
STIM’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 STIM'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 STIM has company-specific issues impacting its capital structure decisions. I suggest you continue to research Neuronetics to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for STIM’s future growth? Take a look at our free research report of analyst consensus for STIM’s outlook.
- Historical Performance: What has STIM'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.
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