Investors are always looking for growth in small-cap stocks like PZ Cussons Plc (LON:PZC), with a market cap of UK£920.36m. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes crucial, as mismanagement of capital can lead to 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. However, this commentary is still very high-level, so I recommend you dig deeper yourself into PZC here.
How much cash does PZC generate through its operations?
PZC’s debt levels have fallen from UK£322.50m to UK£294.70m over the last 12 months , which is mainly comprised of near term debt. With this debt repayment, PZC’s cash and short-term investments stands at UK£150.90m , ready to deploy into the business. Additionally, PZC has generated cash from operations of UK£91.10m in the last twelve months, leading to an operating cash to total debt ratio of 30.91%, meaning that PZC’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In PZC’s case, it is able to generate 0.31x cash from its debt capital.
Can PZC pay its short-term liabilities?
Looking at PZC’s most recent UK£575.90m liabilities, the company has not been able to meet these commitments with a current assets level of UK£508.20m, leading to a 0.88x current account ratio. which is under the appropriate industry ratio of 3x.
Is PZC’s debt level acceptable?
With debt reaching 61.30% of equity, PZC may be thought of as relatively highly levered. 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 PZC 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 PZC’s, case, the ratio of 22.87x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving PZC ample headroom to grow its debt facilities.Next Steps:
PZC’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 low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven’t considered other factors such as how PZC has been performing in the past. I suggest you continue to research PZ Cussons to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PZC’s future growth? Take a look at our free research report of analyst consensus for PZC’s outlook.
- Valuation: What is PZC 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 PZC 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.