While small-cap stocks, such as Polypipe Group plc (LON:PLP) with its market cap of UK£774m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes 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. Nevertheless, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into PLP here.
Does PLP produce enough cash relative to debt?
Over the past year, PLP has reduced its debt from UK£210m to UK£186m , which is made up of current and long term debt. With this debt payback, PLP’s cash and short-term investments stands at UK£39m for investing into the business. On top of this, PLP has produced UK£71m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 38%, meaning that PLP’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In PLP’s case, it is able to generate 0.38x cash from its debt capital.
Can PLP meet its short-term obligations with the cash in hand?
At the current liabilities level of UK£86m liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.58x. For Building companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can PLP service its debt comfortably?
With a debt-to-equity ratio of 59%, PLP 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 check to see whether PLP 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 PLP’s, case, the ratio of 10.74x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
PLP’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how PLP has been performing in the past. You should continue to research Polypipe Group to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PLP’s future growth? Take a look at our free research report of analyst consensus for PLP’s outlook.
- Valuation: What is PLP 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 PLP 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.
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 email@example.com.