Investors are always looking for growth in small-cap stocks like Tabula Rasa Healthcare Inc (NASDAQ:TRHC), with a market cap of $548.60M. However, an important fact which most ignore is: how financially healthy is the business? Healthcare Services companies, especially ones that are currently loss-making, are more likely to be higher risk. Assessing first and foremost the financial health is vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into TRHC here.
Does TRHC generate an acceptable amount of cash through operations?
Over the past year, TRHC has reduced its debt from $39.8M to $1.7M , which is made up of current and long term debt. With this debt payback, the current cash and short-term investment levels stands at $4.3M , ready to deploy into the business. Moreover, TRHC has generated $6.8M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 3.88x, meaning that TRHC’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires positive earnings. In TRHC’s case, it is able to generate 3.88x cash from its debt capital.
Can TRHC meet its short-term obligations with the cash in hand?
With current liabilities at $11.0M liabilities, the company has been able to meet these obligations given the level of current assets of $15.7M, with a current ratio of 1.42x. Generally, for healthcare services companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can TRHC service its debt comfortably?
With a debt-to-equity ratio of 48.63%, TRHC can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since TRHC is currently loss-making, 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.
Are you a shareholder? 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. But, its lack of liquidity means the company may be pressed to meet its short-term obligations, and increasing debt funding to meet these needs could prove difficult. In the future, its financial position may be different. I suggest keeping on top of market expectations for TRHC’s future growth on our free analysis platform.
Are you a potential investor? Investors shouldn’t be put off by TRHC’s high debt levels based on this simple analysis. High level of cash generated from operating activities indicates its debt funding is being effectively used. Though, the company may not be able to pay all of its upcoming liabilities from its current short-term assets. To gain more conviction in the stock, you need to further analyse the company’s track record. As a following step, you should take a look at TRHC’s past performance analysis on our free platform to figure out TRHC’s financial health position.
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.