Seeking Alpha • Aug 31
FONAR: Balance Sheet Trends Point To A Firm Bottom Shortly
Summary
FONAR stock is trading well below book value and remains profitable which is key.
Cash, liquidity and equity all continue to grow on the balance sheet.
We await the technicals to start leading the strong fundamentals in this play.
Intro
We wrote about FONAR Corporation (FONR) (Medical Device Player) in October of last year when we stated that the company was closing in on a multi-year bottom. We have been following Fonar for quite some time now as its valuation, profitability, and balance sheet have the types of trends we like to see in our setups. Since we penned that piece close to 11 months ago, shares are down close to 12% so obviously we were wrong in our timing. Suffice it to say, if we had gone long at that juncture, this simply would not be good enough especially when one takes into account that the S&P did not fall to this magnitude over the stated timeframe. (Opportunity Cost)
Not waiting for a convincing bottom is probably the biggest mistake value investors make when initiating long positions in out-of-favor stocks. This mistake tends to happen a lot because many fundamental derived investors normally investigate the cause of market movement instead of studying the resulting effect. Suffice it to say, we have come to believe that share price action on the technical chart actually leads the known fundamentals, period. This means, that if share-price action is bearish (Sustained pattern of lower lows have been the norm in FONR for quite some time now), then the fundamentals are indeed bearish irrespective of how compelling the stock may look as an investment at this point in time.
Fonar Technical Chart (Stockcharts.com)
This in itself is not a problem because we can play the waiting game. What is of more importance is how the company's financials for example have been faring out during this sustained downturn. Remember, price is what one pays, and value is what one gets. Therefore, by studying some of the key trends in Fonar's balance sheet, we can see if the company is getting more attractive by the day or is finally succumbing to bearish market forces in recent times.
Cash & Equivalents
Over the past 10 quarters, cash & ST investments have risen from $29 million to $46 million in FONAR. Generally, the more cash a company has the better as this cash can be used to reinvest in the business, reward shareholders, or pay down debt. From a valuation standpoint, FONAR shares are now trading for approximately two times their liquid cash position.
Current Ratio
Fonar's current ratio came in at 8.05 at the end of its most recent reported quarter. Again, we see a favorable trend here as the company's current ratio came in at 6.26, ten quarters ago. Suffice it to say, the lack of any real level of liabilities on the balance sheet ensures the company would continue to have the wherewithal to keep paying its bills if indeed operations were to come to a halt for whatever reason.
Non-Current Assets