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Investors are always looking for growth in small-cap stocks like Tabula Rasa HealthCare, Inc. (NASDAQ:TRHC), with a market cap of US$975m. However, an important fact which most ignore is: how financially healthy is the business? Since TRHC is loss-making right now, it’s crucial to understand the current state of its operations and pathway to profitability. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, these checks don't give you a full picture, so I suggest you dig deeper yourself into TRHC here.
Does TRHC Produce Much Cash Relative To Its Debt?
Over the past year, TRHC has ramped up its debt from US$1.9m to US$245m – this includes long-term debt. With this rise in debt, TRHC's cash and short-term investments stands at US$50m to keep the business going. Moving on, operating cash flow was negative 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 TRHC’s operating efficiency ratios such as ROA here.
Can TRHC pay its short-term liabilities?
At the current liabilities level of US$56m, it seems that the business has been able to meet these commitments with a current assets level of US$101m, leading to a 1.8x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Healthcare Services companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can TRHC service its debt comfortably?
TRHC is a highly-leveraged company with debt exceeding equity by over 100%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. However, since TRHC is presently unprofitable, 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.
Although TRHC’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 TRHC'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 TRHC has company-specific issues impacting its capital structure decisions. I suggest you continue to research Tabula Rasa HealthCare to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TRHC’s future growth? Take a look at our free research report of analyst consensus for TRHC’s outlook.
- Valuation: What is TRHC 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 TRHC 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.