While small-cap stocks, such as Inovalon Holdings, Inc. (NASDAQ:INOV) with its market cap of US$1.9b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Healthcare Services companies, especially ones that are currently loss-making, tend to be high risk. Evaluating financial health as part of your investment thesis is crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into INOV here.
Does INOV produce enough cash relative to debt?
Over the past year, INOV has ramped up its debt from US$244m to US$968m , which includes long-term debt. With this rise in debt, INOV’s cash and short-term investments stands at US$115m for investing into the business. Additionally, INOV has generated cash from operations of US$80m during the same period of time, resulting in an operating cash to total debt ratio of 8.2%, meaning that INOV’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for unprofitable companies as traditional metrics such as return on asset (ROA) requires a positive net income. In INOV’s case, it is able to generate 0.082x cash from its debt capital.
Can INOV pay its short-term liabilities?
At the current liabilities level of US$124m, it appears that the company has been able to meet these commitments with a current assets level of US$257m, leading to a 2.07x current account ratio. For Healthcare Services 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.
Does INOV face the risk of succumbing to its debt-load?
INOV is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since INOV is presently loss-making, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
INOV’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 INOV’s liquidity needs, this may be its optimal capital structure for the time being. 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 better picture of the small-cap 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.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.