Investors are always looking for growth in small-cap stocks like Retrophin, Inc. (NASDAQ:RTRX), with a market cap of US$770m. However, an important fact which most ignore is: how financially healthy is the business? Given that RTRX is not presently profitable, it’s essential to assess the current state of its operations and pathway to profitability. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, potential investors would need to take a closer look, and I suggest you dig deeper yourself into RTRX here.
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Does RTRX Produce Much Cash Relative To Its Debt?
RTRX's debt levels surged from US$45m to US$232m over the last 12 months , which accounts for long term debt. With this increase in debt, RTRX currently has US$448m remaining in cash and short-term investments to keep the business going. We note it produced negative cash flow over the last twelve months. For this article’s sake, I won’t be looking at this today, but you can assess some of RTRX’s operating efficiency ratios such as ROA here.
Can RTRX meet its short-term obligations with the cash in hand?
At the current liabilities level of US$104m, it appears that the company has been able to meet these obligations given the level of current assets of US$476m, with a current ratio of 4.57x. The current ratio is the number you get when you divide current assets by current liabilities. Having said that, many consider a ratio above 3x to be high.
Does RTRX face the risk of succumbing to its debt-load?
RTRX is a relatively highly levered company with a debt-to-equity of 81%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. But since RTRX 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.
RTRX’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 RTRX has company-specific issues impacting its capital structure decisions. I recommend you continue to research Retrophin to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for RTRX’s future growth? Take a look at our free research report of analyst consensus for RTRX’s outlook.
- Valuation: What is RTRX 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 RTRX 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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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.