Investors are always looking for growth in small-cap stocks like Pureprofile Ltd (ASX:PPL), with a market cap of AU$17.41M. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Internet industry, especially ones that are currently loss-making, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is vital. I believe these basic checks tell most of the story you need to know. However, I know these factors are very high-level, so I suggest you dig deeper yourself into PPL here.
How does PPL’s operating cash flow stack up against its debt?
PPL’s debt levels surged from AU$270.65K to AU$6.37M over the last 12 months – this includes both the current and long-term debt. With this growth in debt, PPL currently has AU$4.05M remaining in cash and short-term investments , ready to deploy into the business. On top of this, PPL has produced cash from operations of AU$2.38M during the same period of time, leading to an operating cash to total debt ratio of 37.28%, indicating that PPL’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency for unprofitable businesses as traditional metrics such as return on asset (ROA) requires a positive net income. In PPL’s case, it is able to generate 0.37x cash from its debt capital.
Can PPL pay its short-term liabilities?
With current liabilities at AU$25.89M, it appears that the company has not been able to meet these commitments with a current assets level of AU$17.01M, leading to a 0.66x current account ratio. which is under the appropriate industry ratio of 3x.
Is PPL’s debt level acceptable?PPL is a relatively highly levered company with a debt-to-equity of 43.11%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since PPL is currently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
PPL’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. But, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven’t considered other factors such as how PPL has been performing in the past. I recommend you continue to research Pureprofile to get a better picture of the stock by looking at:
- 1. Future Outlook: What are well-informed industry analysts predicting for PPL’s future growth? Take a look at our free research report of analyst consensus for PPL’s outlook.
- 2. Valuation: What is PPL 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 PPL 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.