PS&C Limited (ASX:PSZ) is a small-cap stock with a market capitalization of AU$34.72m. 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? Assessing first and foremost the financial health is vital, 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, I know these factors are very high-level, so I suggest you dig deeper yourself into PSZ here.
How much cash does PSZ generate through its operations?
PSZ has shrunken its total debt levels in the last twelve months, from AU$15.38m to AU$13.20m , which is mainly comprised of near term debt. With this debt payback, PSZ currently has AU$3.23m remaining in cash and short-term investments for investing into the business. Moreover, PSZ has generated cash from operations of AU$3.32m in the last twelve months, leading to an operating cash to total debt ratio of 25.15%, indicating that PSZ’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In PSZ’s case, it is able to generate 0.25x cash from its debt capital.
Can PSZ meet its short-term obligations with the cash in hand?
Looking at PSZ’s most recent AU$35.26m liabilities, it seems that the business has not been able to meet these commitments with a current assets level of AU$17.37m, leading to a 0.49x current account ratio. which is under the appropriate industry ratio of 3x.
Does PSZ face the risk of succumbing to its debt-load?With a debt-to-equity ratio of 17.26%, PSZ’s debt level may be seen as prudent. PSZ is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if PSZ’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For PSZ, the ratio of 2.28x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
PSZ’s high cash coverage and conservative debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. But it is still important for shareholders to understand why the company isn’t increasing its cheaper cost of capital to fund future growth, especially if meeting short-term obligations could also bring about issues. I admit this is a fairly basic analysis for PSZ’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research PS&C to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PSZ’s future growth? Take a look at our free research report of analyst consensus for PSZ’s outlook.
- Valuation: What is PSZ 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 PSZ is currently mispriced by the market.
- 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. For errors that warrant correction please contact the editor at firstname.lastname@example.org.