Pizza Pizza Royalty Corp (TSX:PZA), with a market capitalization of USD $406 Million, is considered a small-cap company. Although such businesses are the ones which could grow the most, they are also highly prone to a downturn in the country’s economy or even a specific region. It’s low debt-to-equity ratio of 17.4% does make it look financially sound, but we must also check how its cash flows and earnings stand against its debt.
Primarily due to the lack of diversification in revenues geographically, often investors opt for a bundle of small-caps. While savvy investors aren’t wrong in looking for singular blockbuster opportunities and trying to achieve diversification on their own by allocating a small part of their portfolio capital to small-caps, that doesn’t make these investments less risky individually. However, to help you reduce that risk, I’m going to provide you with few basic aspects other than debt-to-equity ratio to gauge a ballpark estimate on how financially strong is the company. Check out our latest analysis for Pizza Pizza Royalty
Has Pizza Pizza Royalty got enough cash to weather a storm?
To test Pizza Pizza Royalty’s financial condition further, I would weigh its current assets against the total debt. The level of current assets indicates PZA’s ability to survive a downturn, which most companies face several times in their life cycle. PZA’s current assets to total debt ratio of 16.7% falls short of what I expect from a financially sound company. PZA can face difficult financial challenges during adverse operating environment
Can PZA service its debt comfortably?
Companies invest substantially in acquiring assets. Non-cash expenses such as depreciation and amortization represent ongoing expenses and losses on that front. Thus, it makes the company’s net income an important metric to decide whether the firm is generating economic profits. If earnings measure up strongly against the debt, it’s a sign of financial strength.If a company’s earnings are greater than 5x its interest expense, it indicates sound financial strength as the company earns way more than its debt obligations. In PZA’s case, the interest on debt is well covered by earnings (29.8x coverage).
Not only does Pizza Pizza Royalty has a well-managed debt profile, its interest costs are well covered by its net income and operating cash flows are strong enough to contribute in its growth activities or pay dividends. In short, it’s creating value for shareholders. Now when you know whether you should keep the debt in mind as a risk factor when putting together your investment thesis, I recommend you check out our latest free analysis report on Pizza Pizza Royalty to see what are PZA’s growth prospects and whether it could be considered an undervalued opportunity.
PS. If you are not interested in Pizza Pizza Royalty anymore, you can use our free platform to see my list of over 150 other stocks with a high growth potential.