Depomed Inc (NASDAQ:DEPO) is a small-cap stock with a market capitalization of $541.29M. 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? Companies operating in the pharmaceuticals industry, especially ones that are currently loss-making, are inclined towards being higher risk. Assessing first and foremost the financial health is essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, I know these factors are very high-level, so I recommend you dig deeper yourself into DEPO here.
Does DEPO generate an acceptable amount of cash through operations?
DEPO has shrunken its total debt levels in the last twelve months, from $800.3M to $718.8M , which comprises of short- and long-term debt. With this debt repayment, DEPO’s cash and short-term investments stands at $177.4M , ready to deploy into the business. On top of this, DEPO has generated cash from operations of $65.5M in the last twelve months, resulting in an operating cash to total debt ratio of 9.11%, signalling that DEPO’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency for loss making companies since metrics such as return on asset (ROA) requires a positive net income. In DEPO’s case, it is able to generate 0.09x cash from its debt capital.
Does DEPO’s liquid assets cover its short-term commitments?
With current liabilities at $227.2M liabilities, it appears that the company has been able to meet these commitments with a current assets level of $306.2M, leading to a 1.35x current account ratio. Usually, for pharmaceuticals companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Does DEPO face the risk of succumbing to its debt-load?
With total debt exceeding equities, DEPO is considered a highly levered company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since DEPO is presently loss-making, 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.
Next Steps:
Are you a shareholder? DEPO’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. In addition to this, the company may not be able to pay all of its upcoming liabilities from its current short-term assets. Moving forward, its financial position may be different. You should always be researching market expectations for DEPO’s future growth on our free analysis platform.