While small-cap stocks, such as THC Biomed Intl Ltd (CNSX:THC) with its market cap of CA$56m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Pharmaceuticals industry, especially ones that are currently loss-making, tend to be high risk. Evaluating financial health as part of your investment thesis is essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into THC here.
Does THC produce enough cash relative to debt?
THC’s debt levels have fallen from CA$1.8m to CA$1.7m over the last 12 months , which also accounts for long term debt. With this debt repayment, THC’s cash and short-term investments stands at CA$2.0m , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can assess some of THC’s operating efficiency ratios such as ROA here.
Does THC’s liquid assets cover its short-term commitments?
At the current liabilities level of CA$1.6m, the company has been able to meet these obligations given the level of current assets of CA$3.7m, with a current ratio of 2.28x. For Pharmaceuticals companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Can THC service its debt comfortably?
With debt at 14% of equity, THC may be thought of as appropriately levered. THC is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. Risk around debt is very low for THC, and the company also has the ability and headroom to increase debt if needed going forward.
THC has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for THC’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research THC Biomed Intl to get a more holistic view of the stock by looking at:
- Historical Performance: What has THC’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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
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