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ORBCOMM Inc. (NASDAQ:ORBC) is a small-cap stock with a market capitalization of US$574m. 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 ORBC is not presently profitable, it’s essential to evaluate 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, this is not a comprehensive overview, so I recommend you dig deeper yourself into ORBC here.
ORBC’s Debt (And Cash Flows)
ORBC's debt levels surged from US$247m to US$260m over the last 12 months , which includes long-term debt. With this rise in debt, ORBC currently has US$58m remaining in cash and short-term investments , ready to be used for running the business. On top of this, ORBC has generated US$22m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 8.3%, signalling that ORBC’s debt is not covered by operating cash.
Can ORBC meet its short-term obligations with the cash in hand?
At the current liabilities level of US$65m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.64x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Telecom companies, this is a reasonable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does ORBC face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 97%, ORBC 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 ORBC 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.
Next Steps:
Although ORBC’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for ORBC's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research ORBCOMM to get a better picture of the small-cap by looking at: