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

While small-cap stocks, such as Phileo Australia Limited (ASX:PHI) with its market cap of AU$375.76M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. 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 few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into PHI here.

Does PHI generate enough cash through operations?

PHI has shrunken its total debt levels in the last twelve months, from AU$61.70M to AU$48.49M , which comprises of short- and long-term debt. With this debt payback, PHI’s cash and short-term investments stands at AU$19.33M , ready to deploy into the business. Additionally, PHI has generated cash from operations of AU$33.91M in the last twelve months, leading to an operating cash to total debt ratio of 69.93%, indicating that PHI’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 PHI’s case, it is able to generate 0.7x cash from its debt capital.

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

At the current liabilities level of AU$2.22M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of AU$24.83M, with a current ratio of 11.18x. However, anything above 3x is considered high and could mean that PHI has too much idle capital in low-earning investments.

ASX:PHI Historical Debt Mar 29th 18
ASX:PHI Historical Debt Mar 29th 18

Is PHI’s debt level acceptable?

PHI is a relatively highly levered company with a debt-to-equity of 40.87%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses.

Next Steps:

Although PHI’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. Since there is also no concerns around PHI’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure PHI has company-specific issues impacting its capital structure decisions. You should continue to research Phileo Australia to get a better picture of the small-cap by looking at: