What does Phileo Australia Limited’s (ASX:PHI) Balance Sheet Tell Us About Its Future?

Phileo Australia Limited (ASX:PHI) is a small-cap stock with a market capitalization of AU$366m. 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? Evaluating financial health as part of your investment thesis is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. However, this commentary is still very high-level, so I recommend you dig deeper yourself into PHI here.

How much cash does PHI generate through its operations?

PHI’s debt level has been constant at around AU$47m over the previous year – this includes long-term debt. At this stable level of debt, PHI’s cash and short-term investments stands at AU$153m for investing into the business. Additionally, PHI has produced cash from operations of AU$138m in the last twelve months, resulting in an operating cash to total debt ratio of 291%, indicating that PHI’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In PHI’s case, it is able to generate 2.91x cash from its debt capital.

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

With current liabilities at AU$77m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.02x. For Real Estate companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.

ASX:PHI Historical Debt December 13th 18
ASX:PHI Historical Debt December 13th 18

Is PHI’s debt level acceptable?

With a debt-to-equity ratio of 23%, PHI’s debt level may be seen as prudent. This range is considered safe as PHI is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether PHI 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 PHI’s, case, the ratio of 67.17x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving PHI ample headroom to grow its debt facilities.

Next Steps:

PHI’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how PHI has been performing in the past. I suggest you continue to research Phileo Australia to get a better picture of the stock by looking at:

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