While small-cap stocks, such as XOMA Corporation (NASDAQ:XOMA) with its market cap of US$116m, 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 XOMA is loss-making right now, it’s essential to evaluate 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, potential investors would need to take a closer look, and I recommend you dig deeper yourself into XOMA here.
XOMA’s Debt (And Cash Flows)
XOMA's debt levels surged from US$15m to US$22m over the last 12 months , which includes long-term debt. With this rise in debt, XOMA currently has US$46m remaining in cash and short-term investments , ready to be used for running the business. Its negative operating cash flow means calculating cash-to-debt wouldn't be useful. For this article’s sake, I won’t be looking at this today, but you can assess some of XOMA’s operating efficiency ratios such as ROA here.
Can XOMA pay its short-term liabilities?
At the current liabilities level of US$5.7m, it seems that the business has been able to meet these obligations given the level of current assets of US$48m, with a current ratio of 8.35x. The current ratio is the number you get when you divide current assets by current liabilities. However, many consider a ratio above 3x to be high.
Can XOMA service its debt comfortably?
With total debt exceeding equity, XOMA is considered a highly levered company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. But since XOMA is currently loss-making, 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.
XOMA’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. 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 XOMA has been performing in the past. I suggest you continue to research XOMA to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for XOMA’s future growth? Take a look at our free research report of analyst consensus for XOMA’s outlook.
- Historical Performance: What has XOMA'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.
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