While small-cap stocks, such as OrthoPediatrics Corp (NASDAQ:KIDS) with its market cap of US$340m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Medical Equipment industry, especially ones that are currently loss-making, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is vital. I believe these basic checks tell most of the story you need to know. Though, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into KIDS here.
How much cash does KIDS generate through its operations?
KIDS has shrunken its total debt levels in the last twelve months, from US$28m to US$25m – this includes both the current and long-term debt. With this reduction in debt, KIDS currently has US$24m remaining in cash and short-term investments for investing 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. For this article’s sake, I won’t be looking at this today, but you can assess some of KIDS’s operating efficiency ratios such as ROA here.
Does KIDS’s liquid assets cover its short-term commitments?
At the current liabilities level of US$11m liabilities, the company has been able to meet these obligations given the level of current assets of US$62m, with a current ratio of 5.67x. However, many consider anything above 3x to be quite high.
Does KIDS face the risk of succumbing to its debt-load?
With debt reaching 62% of equity, KIDS 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. Though, since KIDS is currently 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.
KIDS’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 will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how KIDS has been performing in the past. I recommend you continue to research OrthoPediatrics to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for KIDS’s future growth? Take a look at our free research report of analyst consensus for KIDS’s outlook.
- Historical Performance: What has KIDS’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.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.