Investors are always looking for growth in small-cap stocks like NovoCure Limited (NASDAQ:NVCR), with a market cap of US$1.96B. However, an important fact which most ignore is: how financially healthy is the business? Medical Equipment companies, especially ones that are currently loss-making, tend to be high risk. Evaluating financial health as part of your investment thesis is crucial. I believe these basic checks tell most of the story you need to know. However, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into NVCR here.
How does NVCR’s operating cash flow stack up against its debt?
NVCR has sustained its debt level by about US$97.47M over the last 12 months comprising of short- and long-term debt. At this current level of debt, the current cash and short-term investment levels stands at US$183.31M , 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 NVCR’s operating efficiency ratios such as ROA here.
Can NVCR pay its short-term liabilities?
Looking at NVCR’s most recent US$50.20M liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 4.88x. Though, anything about 3x may be excessive, since NVCR may be leaving too much capital in low-earning investments.
Does NVCR face the risk of succumbing to its debt-load?
With debt reaching 85.83% of equity, NVCR 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 NVCR is currently 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.
NVCR’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for NVCR’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research NovoCure to get a better picture of the stock by looking at:
- 1. Future Outlook: What are well-informed industry analysts predicting for NVCR’s future growth? Take a look at our free research report of analyst consensus for NVCR’s outlook.
- 2. Valuation: What is NVCR 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 NVCR is currently mispriced by the market.
- 3. 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 pass 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.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.