Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Investors are always looking for growth in small-cap stocks like Supernus Pharmaceuticals, Inc. (NASDAQ:SUPN), with a market cap of US$1.9b. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, this is not a comprehensive overview, so I’d encourage you to dig deeper yourself into SUPN here.
SUPN’s Debt (And Cash Flows)
SUPN has increased its debt level by about US$329m over the last 12 months accounting for long term debt. With this ramp up in debt, SUPN currently has US$356m remaining in cash and short-term investments to keep the business going. Additionally, SUPN has produced cash from operations of US$129m over the same time period, leading to an operating cash to total debt ratio of 39%, indicating that SUPN’s debt is appropriately covered by operating cash.
Does SUPN’s liquid assets cover its short-term commitments?
At the current liabilities level of US$161m, it seems that the business has been able to meet these commitments with a current assets level of US$493m, leading to a 3.06x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Having said that, a ratio greater than 3x may be considered by some to be quite high, however this is not necessarily a negative for the company.
Does SUPN face the risk of succumbing to its debt-load?
SUPN is a relatively highly levered company with a debt-to-equity of 73%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In SUPN's case, the ratio of 33.84x suggests that interest is comfortably covered, which means that lenders may be willing to lend out more funding as SUPN’s high interest coverage is seen as responsible and safe practice.
SUPN’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 SUPN's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how SUPN has been performing in the past. I suggest you continue to research Supernus Pharmaceuticals to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SUPN’s future growth? Take a look at our free research report of analyst consensus for SUPN’s outlook.
- Valuation: What is SUPN 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 SUPN 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 email@example.com. 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.