Impax Laboratories Inc (NASDAQ:IPXL) is a small-cap stock with a market capitalization of $1.33B. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? A major downturn in the energy industry has resulted in over 150 companies going bankrupt and has put more than 100 on the verge of a collapse, primarily due to excessive debt. These factors make a basic understanding of a company’s financial position of utmost importance for a potential investor. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. View our latest analysis for Impax Laboratories
Does IPXL generate an acceptable amount of cash through operations?
There are many headwinds that come unannounced. For example, in 2011, an earthquake in Japan wiped out a significant chunk of its auto supply chain sector. If these companies had not been well-established with plenty of cash cushion, it would be near impossible to recover damages.These adverse events bring devastation and yet does not absolve the company from its debts.We can test the impact of these adverse events by looking at whether cash from its current operations can pay back its current debt obligations. Last year, IPXL’s operating cash flow was 0.13x its current debt. A ratio of over 0.1x shows that IPXL is generating adequate cash from its core business, which should increase its potential to pay back near-term debt.
Can IPXL meet its short-term obligations with the cash in hand?
In addition to debtholders, a company must be able to pay its bills and salaries to keep the business running. During times of unfavourable events, IPXL could be required to liquidate some of its assets to meet these upcoming payments, as cash flow from operations is hindered. We test for IPXL’s ability to meet these needs by comparing its cash and short-term investments with current liabilities. Our analysis shows that IPXL is unable to meet all of its upcoming commitments with its cash and other short-term assets. While this is not abnormal for companies, as their cash is better invested in the business or returned to investors than lying around, it does bring about some concerns should any unfavourable circumstances arise.
Is IPXL’s level of debt at an acceptable level?
Debt-to-equity ratio tells us how much of the asset debtors could claim if the company went out of business. IPXL’s debt-to-equity ratio stands at 149.26%, which means that it is a highly leveraged company. This is not a problem if the company has consistently grown its profits. But during a business downturn, as liquidity may dry up, making it hard to operate. We can test if IPXL’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings should cover interest by at least three times, therefore reducing concerns when profit is highly volatile. IPXL’s interest on debt is not strongly covered by earnings as it sits at around 0.77x. Debtors may be less inclined to loan the company more money, giving IPXL less headroom for growth through debt.
IPXL’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. In addition to this, the company may not be able to pay all of its upcoming liabilities from its current short-term assets. Now that you know to keep debt in mind when putting together your investment thesis, I recommend you check out our latest free analysis report on Impax Laboratories to see what other factors for IPXL you should consider.
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