The DCTH stock price has been in news for the volatile swings.
This is essentially an OTC stock where even a few penny difference can make a huge margin.
It is primarily popular for the explosive growth that it clocks.
But you cannot buy a small cap stock just on the basis of price moves.
A thorough understanding of the business is essential too.
The problem is if you are in the DCTH stock for just price moves, it can be tricky too.
So investors have to carefully analyze the company’s balance sheet too.
If a counter does not have the financials to back up the price moves, sustainability is a problem.
Close to 20,000 companies become bankrupt in US every quarter.
In that scenario, mere stock price movement cannot sustain gains for too long.
The smallest triggers and the geopolitical situation have a distinct bearing on the price moves.
So you need to have a distinct understanding of the business fundamentals.
That will give investors a detailed understanding of the company’s fundamentals.
Irrespective of the price movement, the core business model has to instill confidence.
That alone will help you take a call on the long-term prospects.
Only that will give company strength to withstand any financial stability.
However, Delcath Systems or DCTH raises some key worries on this count.
The long-term revenue source and cash flow are the primary worries.
That’s what is making many analysts put a Strong Sell on the stock.
In that context, the question is, should you invest in DCTH stock still?
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Delcath Systems Profile
Delcath Systems is essentially a pharmaceutical company specializing in medical devices.
In fact, this is a development stage business.
Their focus area is liver cancer and development of devices for treatment of various conditions.
The development and study of Delcath chemosaturation system are the most talked about innovation.
This device is especially for patients with metastatic liver cancer.
This New York-based company was founded in 1989.
In short, the product that they manufacture will be used to administer chemotherapy.
The idea is to provide systematic exposure to chemotherapy.
At the same time, this system keeps side effects under control.
The company has already undertaken the Phase 3 clinical trial for its patients.
The US FDA nod for the Chemosat is a major catalyst.
The stock is up 73% in 2017, and many consider it as a major buy.
Adverse effect of chemotherapy Vs. Chemosat’s limited side effects is a positive.
The overall financial perspective and low survival rate in liver cancer are important.
In many ways, that is a major reason many consider DCTH a major small-cap counter.
Is The DCTH Cash Flow Satisfactory?
One of the first factors that you will consider is the cash flow.
As they say, at the end of the day a company needs to pay its bills and expand the business.
They need cash to help expand operations and invest in interesting projects.
What is particularly worrying is this lack of a revenue perspective.
Needless to mention that it has been impacting cashflow accordingly.
The operating cashflow has turned into the negative zone, well below -200%.
In fact, 2016-2017 numbers dipped to well below -250% of the complete debt.
That means only one basic thing, their expenses are more than the money they are earning.
Well, you can say that most companies that are in growing stage, do go through these phases.
But the concern here is that neither is this temporary situation nor is the company a new entrant.
This is an established company, and the ever-expanding negative cash flow is a matter of concern.
It highlights the tremendous gap in possibilities, potential and actual performance.
This signals troubled times ahead for this pharma player.
Though the advantage is that they have a solid core concept, it is not sufficient.
The revenue inflow indicators are not clear at all.
The market cap for this company is under $6 million.
Despite being in business for almost 40 years, the relative market cap is quite low.
The earnings per share are down over 60%.
This is worrying, no doubt.
It only goes on to enhance the bleak earnings scope as of now.
While there is no debating the fundamental concept, the real prospect is a challenge.
As of now, the company has not been able to capitalize on the opportunity available.
How to Handle the Short-Term Debt
The limited cash flow and revenue source also have severe implication on debt servicing.
Normally companies take on debt to improve the revenue picture.
They then use the same revenue to pay back the debt.
Primarily, the short-term debts are crucial to maintain cashflow.
Often companies take up this debt to tide over immediate cash crunch.
But with the DCTH stock, this is not the case.
The net income for the company slumped into the severely negative zone, close to -18,000 levels.
These numbers are merely indicative of the deep-set problems therein.
Does it have the sufficient resources to address the short-term obligations?
As of now, the company is coping with the cash holdings and short-term assets.
But these are only 1-year commitments.
The question is the level of sustainability of the overall financing plan can pose a problem.
In the absence of sustained revenue generation, the earnings are slipping.
That also means that the gap between revenue and expenses is widening.
How soon or how they handle the short-term concerns goes onto creating a long-term roadmap as well.
Needless to mention that this is a huge red flag for the company.
Debt Levels Stretching to Worry Zone
The reason the current situation is a red flag is that of the negative impact on the DCTH stock.
Well, we all know that the debt-equity ratio of businesses varies with industries.
In some industries, a very high debt-equity ratio can be normal.
Whereas, in many others, even the moderate limits can be worrying.
This is because the debt-equity ratio is purely a function of business lifecycles.
Typically, the financial arrangement of every company is different.
But the DCTH stock has a phenomenally high debt-equity ratio.
The 143% debt-equity ratio screams trouble from every corner.
Typically you see the ratio hovering below 40% level for most companies.
Though a generic number, it will give you a fair parameter to compare the difference.
Any debt-equity ratio that is north of 100% mark indicates very leveraged positions.
It highlights that the company’s financials are not managed appropriately.
In many ways, it is a solid indicator that the business is not progressing the way it should.
The company’s ability to pay can be severely compromised.
So in case, there is any type of financial stress, the company may find it difficult to meet the debt obligation.
Ideally, the earnings should be able to cover at least 5x the interest cost.
But in case of the DCTH stock, the earnings do not cover the interest cost appropriately.
In many ways, that is one of the biggest points of worries about the company.
It highlights the short-term and long-term challenges involved in arranging financials.
At the same time, when you go ahead and buy a stock, you need a certain amount of return prospects.
So the DCTH stock fails to offer that kind of assurance in terms of long-term gains.
Hype on No News
There are many reasons why a stock price rises.
The most common trigger is, of course, a new based rally.
In this case, a certain type of news triggers a rally in the stock price.
The stock goes up as investors feel the specific news can add further value to the stock.
The other triggers are of course the intrinsic value of the stock price.
If the stock is trading at a very low price or brokerages estimate a higher target price, it gains.
However, the DCTH stock price has defied all common logic in this context.
The stock price has rallied close to 1000% in a matter of months.
Yet this rally has no triggers.
There is no new to support this huge price rise.
In fact, on the contrary, there is enough matter for investors to get out of this stock.
However, despite this, the stock has been on the rise on no news.
That, in itself, is a cause for concern.
This is almost a sure sign of a certain degree of speculative price build-up.
In fact, it highlights the possibility of sudden and large downward spiral in pricing.
The company is continuing clinical trials on a technology that US FA rejected in 2013.
It has now facilitated its convertible note holders to buy shares at 15% discount.
The convertible note holders also have the right to sell immediately.
Needless to mention that this can only increase share supply.
This will also further worsen the stock price prospects going forward.
The whole idea is that the fundamental principles of investment do not support the price rise.
Almost every indicator seems to signal a potential downward spiral.
The worry is exactly when and how this sets in and the duration too.
DCTH Stock Price Suffering from Policy Lapse
Let’s face it; all the key parameters in the DCTH income statement is in negative zone.
Practically there is no development that signals an improvement in the revenue situation.
The debt-equity ratio is also at alarming levels.
In this context, one fact is clear; the company is in dire need of funding.
But that does not seem to deter the spending cycles of the company.
Especially in context, how the key executives have such huge salaries is intriguing.
This bleeding pharma stock ensures the high life for most of its high flying executives.
Delcath is burning cash at an alarming rate of $4 million per quarter.
Despite this cash outgo and intrinsic problems, the management has not cut down its pay.
They continue the high spending that has been the norm thus far.
It ranges from offering high paying salaries to fully paid expensive trips.
There are also bonus components in the salary.
The DCTH stock has a market cap of less than $6 million.
However, its CEO gets a salary close to $590,000.
The fact that the company is running out of funds this fast doesn’t seem to deter the management.
A Glassdoor review once described the management quality as corrupt and unprofessional.
When a business is going through tough times, the employee salary faces the axe upfront.
From mass sacking to a salary cut, there can be many ways to tackle cost.
But surprisingly, in this case, the management just does not seem to worry.
It almost feels that the company’s management just doesn’t care.
Then again the same problem comes to the forefront.
Why would I want to buy DCTH stock if there is no policy to put finances on track?
This will only exacerbate its financial liabilities over the longer term.
DCTH Desperate to Raise Funds
It, therefore, does not come as a surprise that DCTH is now desperate for funds.
That perhaps gives you an indication why the company went for the reverse convertible notes.
Right now, the resource crunch is so severe the company is ready to explore all avenues to raise funds.
As a result, the management is exploring every possible option to address the issue.
The core idea seems to be raising money in whatever way possible.
Hence in that context, this convertible debt financing seems to be the most obvious alternative.
Many experts have also termed it as death spiral financing.
This is precisely because of the worrying state of affairs it creates for the DCTH stock price.
In a notice to shareholders, it clearly highlights the company’s desperation for funds.
They have mentioned that the company had considered private placements.
They had even considered a public offering in capital markets.
But, all the effort did not yield fruit.
The company was unable to decide on any other means to raise funds.
As a result, no alternative to address the liquidity needs was decided upon.
So finally, DCTH issued $35.0 million senior secured convertible notes.
These notes can be converted into shares of the common DCTH stock.
The conversion can happen at the discounted price.
It is needless to mention that it may help resort some short-term funding problem.
But at the same time, this does precious little to strengthen the stock value.
So the relative gain for the shareholder is next to nothing.
This step, therefore, does precious little apart from helping raise money.
But at the same time, this fundraising lowers the stock’s fair value indirectly.
DCTH Stock Price Indicate Worrying Trend
The convertible notes led to an additional decrease in share’s fair value.
It has also created clause to adequately help investors in selling the shares in the market easily.
Let us also see what the key market indicators highlight.
The 14-day ADX rating for DCTH stock is above the 40 mark.
Normally, an ADX reading between 0-25 indicates a weak price trend.
But for DCTH stock, it seems to indicate a strong trend.
However, this does not facilitate understanding the overall stock direction.
Let us see what the RSI or the Relative Strength Index indicates.
It is one of the most widely accepted measures of volatility in the market.
Normally stocks range between 30 and 70.
A reading above 70 indicates overbought zone.
If the reading is below 30, it is an indicator of oversold positions.
The DCTH stock price is continuously indicating oversold position.
Well, does it mean, you should go and buy the stock?
Well, the DCTH stock price is not the only factor here.
The business fundamentals take up a larger role.
Conclusion: Delcath Systems Has Serious Balance Sheet Issues
Therefore, we can easily conclude that Delcath Systems has serious balance sheet issues.
Moreover, the debt situation also casts a pall of gloom on the DCTH stock price.
To make matters worse, the company is unable to showcase any strong revenue generation plan.
The earnings and cash flow are far less than adequate to cover the expenses of the DCTH stock.
So please keep in mind these risk elements before committing money to the DCTH stock.
It does not deserve investment just because it is a penny stock.
You must be very careful before buying even a single unit of the DCTH stock.