Palfinger AG (VIE:PAL): Time For A Financial Health Check

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Palfinger AG (VIE:PAL) is a small-cap stock with a market capitalization of €936m. 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? So, understanding the company’s financial health becomes crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. 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 PAL here.

Does PAL produce enough cash relative to debt?

PAL’s debt level has been constant at around €580m over the previous year – this includes long-term debt. At this current level of debt, the current cash and short-term investment levels stands at €40m for investing into the business. On top of this, PAL has produced cash from operations of €127m over the same time period, resulting in an operating cash to total debt ratio of 22%, indicating that PAL’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In PAL’s case, it is able to generate 0.22x cash from its debt capital.

Can PAL meet its short-term obligations with the cash in hand?

Looking at PAL’s €415m in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of €717m, with a current ratio of 1.73x. Usually, for Machinery companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

WBAG:PAL Historical Debt February 20th 19
WBAG:PAL Historical Debt February 20th 19

Is PAL’s debt level acceptable?

Since total debt levels have outpaced equities, PAL is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In PAL’s case, the ratio of 10.45x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving PAL ample headroom to grow its debt facilities.

Next Steps:

Although PAL’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. This is only a rough assessment of financial health, and I’m sure PAL has company-specific issues impacting its capital structure decisions. You should continue to research Palfinger to get a more holistic view of the small-cap by looking at:

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

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.