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Everspin Technologies, Inc. (NASDAQ:MRAM) is a small-cap stock with a market capitalization of US$113m. 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? Semiconductor companies, in particular ones that run negative earnings, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is crucial. I believe these basic checks tell most of the story you need to know. Though, this commentary is still very high-level, so I suggest you dig deeper yourself into MRAM here.
How does MRAM’s operating cash flow stack up against its debt?
MRAM has sustained its debt level by about US$12m over the last 12 months which accounts for long term debt. At this constant level of debt, MRAM’s cash and short-term investments stands at US$31m for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can take a look at some of MRAM’s operating efficiency ratios such as ROA here.
Can MRAM meet its short-term obligations with the cash in hand?
Looking at MRAM’s US$16m in current liabilities, the company has been able to meet these obligations given the level of current assets of US$47m, with a current ratio of 2.95x. For Semiconductor companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does MRAM face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 45%, MRAM can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since MRAM 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.
Next Steps:
MRAM’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 MRAM’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for MRAM’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Everspin Technologies to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for MRAM’s future growth? Take a look at our free research report of analyst consensus for MRAM’s outlook.
- Historical Performance: What has MRAM’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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 editorial-team@simplywallst.com.