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Are Australian Pharmaceutical Industries Limited’s (ASX:API) Interest Costs Too High?

While small-cap stocks, such as Australian Pharmaceutical Industries Limited (ASX:API) with its market cap of AU$647.54M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Healthcare industry, even ones that are profitable, are more likely to be higher risk. So, understanding the company’s financial health becomes crucial. 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 recommend you dig deeper yourself into API here.

How does API’s operating cash flow stack up against its debt?

API’s debt levels have fallen from AU$51.40M to AU$32.60M over the last 12 months , which is made up of current and long term debt. With this debt repayment, API’s cash and short-term investments stands at AU$39.78M for investing into the business. Additionally, API has produced cash from operations of AU$95.48M in the last twelve months, resulting in an operating cash to total debt ratio of 292.90%, meaning that API’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In API’s case, it is able to generate 2.93x cash from its debt capital.

Does API’s liquid assets cover its short-term commitments?

At the current liabilities level of AU$851.03M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of AU$1.12B, with a current ratio of 1.32x. Usually, for Healthcare companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.

ASX:API Historical Debt Jun 21st 18
ASX:API Historical Debt Jun 21st 18

Can API service its debt comfortably?

With a debt-to-equity ratio of 9.27%, API’s debt level is relatively low. API is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether API is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In API’s, case, the ratio of 23.9x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving API ample headroom to grow its debt facilities.

Next Steps:

API has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for API’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Australian Pharmaceutical Industries to get a better picture of the stock by looking at:

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  1. Future Outlook: What are well-informed industry analysts predicting for API’s future growth? Take a look at our free research report of analyst consensus for API’s outlook.

  2. Valuation: What is API 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 API is currently mispriced by the market.

  3. 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 pass 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.