Investors are always looking for growth in small-cap stocks like Acerus Pharmaceuticals Corporation (TSE:ASP), with a market cap of CA$53.30m. However, an important fact which most ignore is: how financially healthy is the business? Pharmaceuticals companies, especially ones that are currently loss-making, tend to be high risk. Assessing first and foremost the financial health is vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into ASP here.
How much cash does ASP generate through its operations?
Over the past year, ASP has reduced its debt from CA$6.45m to CA$4.57m , which is made up of current and long term debt. With this reduction in debt, ASP currently has CA$3.16m remaining in cash and short-term investments for investing into the business. However, ASP is only producing CA$99.00k in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of less than 1x, signalling that debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency for loss making companies since metrics such as return on asset (ROA) requires a positive net income. In ASP’s case, it produces less than 1x cash from its debt capital.
Can ASP pay its short-term liabilities?
At the current liabilities level of CA$5.42m liabilities, it appears that the company has been able to meet these obligations given the level of current assets of CA$8.21m, with a current ratio of 1.52x. Usually, for Pharmaceuticals companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does ASP face the risk of succumbing to its debt-load?With debt reaching 48.07% of equity, ASP may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since ASP 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.
ASP’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how ASP has been performing in the past. I suggest you continue to research Acerus Pharmaceuticals to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ASP’s future growth? Take a look at our free research report of analyst consensus for ASP’s outlook.
- Historical Performance: What has ASP’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.