Pets at Home Group Plc (LON:PETS) is a small-cap stock with a market capitalization of UK£677m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Companies operating in the Specialty Retail industry facing headwinds from current disruption, even ones that are profitable, are more likely to be higher risk. So, understanding the company’s financial health becomes vital. I believe these basic checks tell most of the story you need to know. Nevertheless, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into PETS here.
How much cash does PETS generate through its operations?
PETS’s debt levels have fallen from UK£208m to UK£193m over the last 12 months , which includes long-term debt. With this debt repayment, the current cash and short-term investment levels stands at UK£63m for investing into the business. Additionally, PETS has produced cash from operations of UK£105m over the same time period, resulting in an operating cash to total debt ratio of 54%, signalling that PETS’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In PETS’s case, it is able to generate 0.54x cash from its debt capital.
Can PETS pay its short-term liabilities?
Looking at PETS’s UK£202m in current liabilities, it appears that the company may not be able to easily meet these obligations given the level of current assets of UK£197m, with a current ratio of 0.97x.
Does PETS face the risk of succumbing to its debt-load?
With debt at 22% of equity, PETS may be thought of as appropriately levered. PETS is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether PETS 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 PETS’s, case, the ratio of 14.37x 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.
PETS’s debt level is appropriate for a company its size. Furthermore, it is able to generate sufficient cash flow coverage, meaning it is able to put its debt in good use. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for PETS’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research at Home Group to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PETS’s future growth? Take a look at our free research report of analyst consensus for PETS’s outlook.
- Valuation: What is PETS 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 PETS 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.