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Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like Zogenix, Inc. (NASDAQ:ZGNX), with a market cap of US$2.0b, are often out of the spotlight. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. Today we will look at ZGNX’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into ZGNX here.
Is ZGNX’s debt level acceptable?
A debt-to-equity ratio threshold varies depending on what industry the company operates, since some requires more debt financing than others. As a rule of thumb, a financially healthy mid-cap should have a ratio less than 40%. The good news for investors is that Zogenix has no debt. This means it has been running its business utilising funding from only its equity capital, which is rather impressive. Investors' risk associated with debt is virtually non-existent with ZGNX, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Does ZGNX’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, Zogenix has no solvency issues, which is used to describe the company’s ability to meet its long-term obligations. But another important aspect of financial health is liquidity: the company’s ability to meet short-term obligations, including payments to suppliers and employees. With current liabilities at US$56m, it appears that the company has been able to meet these commitments with a current assets level of US$511m, leading to a 9.12x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. However, a ratio above 3x may be considered excessive by some investors.
ZGNX has zero-debt as well as ample cash to cover its near-term commitments. Its safe operations reduces risk for the company and shareholders, though, some level of debt could also boost earnings growth and operational efficiency. This is only a rough assessment of financial health, and I'm sure ZGNX has company-specific issues impacting its capital structure decisions. I suggest you continue to research Zogenix to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ZGNX’s future growth? Take a look at our free research report of analyst consensus for ZGNX’s outlook.
- Valuation: What is ZGNX 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 ZGNX 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.