Harvard Bioscience, Inc. (NASDAQ:HBIO) is a small-cap stock with a market capitalization of US$151m. 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? Given that HBIO is not presently profitable, it’s vital to assess the current state of its operations and pathway to profitability. The following basic checks can help you get a picture of the company’s balance sheet strength. Nevertheless, potential investors would need to take a closer look, and I recommend you dig deeper yourself into HBIO here.
Does HBIO Produce Much Cash Relative To Its Debt?
HBIO’s debt levels surged from US$12m to US$61m over the last 12 months , which includes long-term debt. With this rise in debt, HBIO’s cash and short-term investments stands at US$8.2m to keep the business going. Moreover, HBIO has generated US$2.9m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 4.7%, meaning that HBIO’s operating cash is less than its debt.
Does HBIO’s liquid assets cover its short-term commitments?
With current liabilities at US$22m, the company has been able to meet these commitments with a current assets level of US$58m, leading to a 2.69x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Life Sciences companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is HBIO’s debt level acceptable?
With a debt-to-equity ratio of 73%, HBIO can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. But since HBIO is currently 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.
HBIO’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 HBIO has company-specific issues impacting its capital structure decisions. You should continue to research Harvard Bioscience to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for HBIO’s future growth? Take a look at our free research report of analyst consensus for HBIO’s outlook.
- Valuation: What is HBIO 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 HBIO 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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