THC Biomed Intl Ltd (CNSX:THC) is a small-cap stock with a market capitalization of CA$153.75m. 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? Pharmaceuticals companies, especially ones that are currently loss-making, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is crucial. I believe these basic checks tell most of the story you need to know. However, this commentary is still very high-level, so I recommend you dig deeper yourself into THC here.
Does THC produce enough cash relative to debt?
THC has built up its total debt levels in the last twelve months, from CA$777.19k to CA$0 , which is made up of current and long term debt. With this increase in debt, THC’s cash and short-term investments stands at CA$22.85k , 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 examine some of THC’s operating efficiency ratios such as ROA here.
Can THC meet its short-term obligations with the cash in hand?
Looking at THC’s most recent CA$4.61m liabilities, it appears that the company is not able to meet these obligations given the level of current assets of CA$727.39k, with a current ratio of 0.16x below the prudent level of 3x.
Does THC face the risk of succumbing to its debt-load?
With total debt exceeding equities, THC is considered a highly levered company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. However, since THC is currently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.Next Steps:
With a high level of debt on its balance sheet, THC could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for THC to increase its operational efficiency. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven’t considered other factors such as how THC has been performing in the past. You should continue to research THC Biomed Intl to get a more holistic view of the stock by looking at:
- Valuation: What is THC 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 THC is currently mispriced by the market.
- 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.