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While small-cap stocks, such as Retrophin, Inc. (NASDAQ:RTRX) with its market cap of US$768m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since RTRX is loss-making right now, it’s essential 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. Nevertheless, this is just a partial view of the stock, and I suggest you dig deeper yourself into RTRX here.
Does RTRX Produce Much Cash Relative To Its Debt?
RTRX has built up its total debt levels in the last twelve months, from US$45m to US$232m , which includes long-term debt. With this rise in debt, RTRX's cash and short-term investments stands at US$448m , ready to be used for running the business. Moving on, operating cash flow was negative over the last twelve months. For this article’s sake, I won’t be looking at this today, but you can take a look at some of RTRX’s operating efficiency ratios such as ROA here.
Does RTRX’s liquid assets cover its short-term commitments?
At the current liabilities level of US$104m, the company has been able to meet these obligations given the level of current assets of US$476m, with a current ratio of 4.57x. The current ratio is the number you get when you divide current assets by current liabilities. Having said that, a ratio greater than 3x may be considered high by some.
Is RTRX’s debt level acceptable?
RTRX is a relatively highly levered company with a debt-to-equity of 81%. 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 RTRX is currently unprofitable, 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 RTRX’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 RTRX'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 RTRX has company-specific issues impacting its capital structure decisions. You should continue to research Retrophin to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for RTRX’s future growth? Take a look at our free research report of analyst consensus for RTRX’s outlook.
- Valuation: What is RTRX 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 RTRX is currently mispriced by the market.
- 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 firstname.lastname@example.org. 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.