Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like Inovalon Holdings, Inc. (NASDAQ:INOV), with a market cap of US$2.1b, are often out of the spotlight. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. Let’s take a look at INOV’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into INOV here.
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How does INOV’s operating cash flow stack up against its debt?
INOV’s debt levels surged from US$244m to US$968m over the last 12 months – this includes long-term debt. With this increase in debt, INOV’s cash and short-term investments stands at US$115m for investing into the business. On top of this, INOV has produced cash from operations of US$80m in the last twelve months, leading to an operating cash to total debt ratio of 8.2%, signalling that INOV’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for loss making companies since metrics such as return on asset (ROA) requires positive earnings. 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 seems that the business has been able to meet these commitments with a current assets level of US$257m, leading to a 2.07x current account ratio. Usually, for Healthcare Services 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.
Can INOV service its debt comfortably?
INOV is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since INOV is presently unprofitable, 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.
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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure INOV has company-specific issues impacting its capital structure decisions. I recommend you continue to research Inovalon Holdings to get a more holistic view of the mid-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 email@example.com.