Investors are always looking for growth in small-cap stocks like Produce Investments plc (LON:PIL), with a market cap of UK£39.04m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into PIL here.
How much cash does PIL generate through its operations?
PIL’s debt levels surged from UK£29.84m to UK£31.99m over the last 12 months – this includes both the current and long-term debt. With this increase in debt, PIL’s cash and short-term investments stands at UK£1.84m for investing into the business. Moreover, PIL has generated cash from operations of UK£10.86m during the same period of time, leading to an operating cash to total debt ratio of 33.97%, signalling that PIL’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In PIL’s case, it is able to generate 0.34x cash from its debt capital.
Can PIL pay its short-term liabilities?
With current liabilities at UK£43.43m, it appears that the company has been able to meet these obligations given the level of current assets of UK£69.07m, with a current ratio of 1.59x. For Food 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.
Is PIL’s debt level acceptable?PIL is a relatively highly levered company with a debt-to-equity of 58.53%. 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 PIL 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 PIL’s, case, the ratio of 15.58x 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.
PIL’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. Since there is also no concerns around PIL’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how PIL has been performing in the past. You should continue to research Produce Investments to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PIL’s future growth? Take a look at our free research report of analyst consensus for PIL’s outlook.
- Valuation: What is PIL 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 PIL 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.