What Investors Should Know About GenMark Diagnostics, Inc.'s (NASDAQ:GNMK) Financial Strength

While small-cap stocks, such as GenMark Diagnostics, Inc. (NASDAQ:GNMK) with its market cap of US$402m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since GNMK is loss-making right now, it’s essential to evaluate the current state of its operations and pathway to profitability. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, potential investors would need to take a closer look, and I suggest you dig deeper yourself into GNMK here.

Does GNMK Produce Much Cash Relative To Its Debt?

Over the past year, GNMK has ramped up its debt from US$28m to US$36m – this includes long-term debt. With this rise in debt, GNMK currently has US$45m remaining in cash and short-term investments , ready to be used for running the business. We note it produced negative cash flow over the last twelve months. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of GNMK’s operating efficiency ratios such as ROA here.

Does GNMK’s liquid assets cover its short-term commitments?

At the current liabilities level of US$20m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.37x. The current ratio is the number you get when you divide current assets by current liabilities. However, many consider a ratio above 3x to be high.

Is GNMK’s debt level acceptable?

GNMK is a highly-leveraged company with debt exceeding equity by over 100%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. Though, since GNMK is currently loss-making, sustainability of its current state of operations becomes a concern. 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:

GNMK’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around GNMK's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how GNMK has been performing in the past. I recommend you continue to research GenMark Diagnostics to get a better picture of the small-cap by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for GNMK’s future growth? Take a look at our free research report of analyst consensus for GNMK’s outlook.
2. Valuation: What is GNMK 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 GNMK is currently mispriced by the market.
3. 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.