Stocks with market capitalization between $2B and $10B, such as Array BioPharma Inc. (NASDAQ:ARRY) with a size of US$4.9b, do not attract as much attention from the investing community as do the small-caps and large-caps. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. Let’s take a look at ARRY’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 commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into ARRY here.
ARRY’s Debt (And Cash Flows)
ARRY’s debt levels surged from US$106m to US$133m over the last 12 months , which accounts for long term debt. With this growth in debt, the current cash and short-term investment levels stands at US$477m , ready to be used for running the business. Its negative operating cash flow means calculating cash-to-debt wouldn’t be useful. For this article’s sake, I won’t be looking at this today, but you can take a look at some of ARRY’s operating efficiency ratios such as ROA here.
Can ARRY pay its short-term liabilities?
With current liabilities at US$84m, it seems that the business has been able to meet these obligations given the level of current assets of US$531m, with a current ratio of 6.31x. The current ratio is calculated by dividing current assets by current liabilities. Having said that, a ratio greater than 3x may be considered high by some.
Can ARRY service its debt comfortably?
With a debt-to-equity ratio of 46%, ARRY can be considered as an above-average leveraged company. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. But since ARRY is presently unprofitable, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Although ARRY’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around ARRY’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for ARRY’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Array BioPharma to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ARRY’s future growth? Take a look at our free research report of analyst consensus for ARRY’s outlook.
- Valuation: What is ARRY 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 ARRY 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.
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