Investors are always looking for growth in small-cap stocks like Polaris Infrastructure Inc (TSE:PIF), with a market cap of CA$161m. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. However, this commentary is still very high-level, so I suggest you dig deeper yourself into PIF here.
How much cash does PIF generate through its operations?
PIF has shrunken its total debt levels in the last twelve months, from US$171m to US$160m – this includes long-term debt. With this debt payback, PIF’s cash and short-term investments stands at US$40m for investing into the business. Additionally, PIF has generated US$38m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 24%, signalling that PIF’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 PIF’s case, it is able to generate 0.24x cash from its debt capital.
Does PIF’s liquid assets cover its short-term commitments?
With current liabilities at US$20m, the company has been able to meet these obligations given the level of current assets of US$56m, with a current ratio of 2.83x. Generally, for Renewable Energy companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Is PIF’s debt level acceptable?
With a debt-to-equity ratio of 85%, PIF can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if PIF’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 PIF, the ratio of 2.22x 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.
Although PIF’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. I admit this is a fairly basic analysis for PIF’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Polaris Infrastructure to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PIF’s future growth? Take a look at our free research report of analyst consensus for PIF’s outlook.
- Valuation: What is PIF 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 PIF 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 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.
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