Investors are always looking for growth in small-cap stocks like Impression Healthcare Limited (ASX:IHL), with a market cap of AU$7.38M. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Medical Equipment industry, especially ones that are currently loss-making, are inclined towards being higher risk. Assessing first and foremost the financial health is vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into IHL here.
How does IHL’s operating cash flow stack up against its debt?
Over the past year, IHL has reduced its debt from AU$700.00K to AU$397.46K , which is made up of current and long term debt. With this reduction in debt, IHL currently has AU$506.91K remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can assess some of IHL’s operating efficiency ratios such as ROA here.
Can IHL pay its short-term liabilities?
At the current liabilities level of AU$771.56K liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.09x. Usually, for Medical Equipment companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does IHL face the risk of succumbing to its debt-load?
With debt reaching 53.09% of equity, IHL may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since IHL is presently loss-making, sustainability of its current state of operations becomes a concern. 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:
IHL’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure IHL has company-specific issues impacting its capital structure decisions. You should continue to research Impression Healthcare to get a better picture of the stock by looking at: