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While small-cap stocks, such as TRACON Pharmaceuticals, Inc. (NASDAQ:TCON) with its market cap of US$24m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that TCON is not presently profitable, it’s essential 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. Nevertheless, this is not a comprehensive overview, so I recommend you dig deeper yourself into TCON here.
Does TCON Produce Much Cash Relative To Its Debt?
TCON has built up its total debt levels in the last twelve months, from US$7.1m to US$7.7m – this includes long-term debt. With this growth in debt, TCON's cash and short-term investments stands at US$32m to keep the business going. We note it produced negative cash flow 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 TCON’s operating efficiency ratios such as ROA here.
Does TCON’s liquid assets cover its short-term commitments?
With current liabilities at US$14m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.44x. The current ratio is calculated by dividing current assets by current liabilities. For Biotechs companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does TCON face the risk of succumbing to its debt-load?
TCON is a relatively highly levered company with a debt-to-equity of 44%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. But since TCON is presently 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 TCON’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven't considered other factors such as how TCON has been performing in the past. I recommend you continue to research TRACON Pharmaceuticals to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TCON’s future growth? Take a look at our free research report of analyst consensus for TCON’s outlook.
- Historical Performance: What has TCON'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.
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.