Inovalon Holdings Inc (NASDAQ:INOV) is a small-cap stock with a market capitalization of US$1.53b. 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? Companies operating in the Healthcare Services industry, even ones that are profitable, tend to be high risk. Assessing first and foremost the financial health is crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into INOV here.
How does INOV’s operating cash flow stack up against its debt?
Over the past year, INOV has reduced its debt from US$259.05m to US$241.95m – this includes both the current and long-term debt. With this debt repayment, INOV’s cash and short-term investments stands at US$450.28m , ready to deploy into the business. Additionally, INOV has generated US$102.25m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 42.26%, signalling that INOV’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In INOV’s case, it is able to generate 0.42x cash from its debt capital.
Does INOV’s liquid assets cover its short-term commitments?
With current liabilities at US$123.79m, the company has been able to meet these obligations given the level of current assets of US$554.69m, with a current ratio of 4.48x. Though, a ratio greater than 3x may be considered as too high, as INOV could be holding too much capital in a low-return investment environment.
Is INOV’s debt level acceptable?INOV’s level of debt is appropriate relative to its total equity, at 38.30%. This range is considered safe as INOV is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if INOV’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For INOV, the ratio of 2.49x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
INOV’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for INOV’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Inovalon Holdings to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for INOV’s future growth? Take a look at our free research report of analyst consensus for INOV’s outlook.
- Valuation: What is INOV 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 INOV is currently mispriced by the market.
- 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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