While small-cap stocks, such as Plutus PowerGen Plc (LON:PPG) with its market cap of UK£3.4m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that PPG is not presently profitable, it’s vital to understand the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, I know these factors are very high-level, so I suggest you dig deeper yourself into PPG here.
How does PPG’s operating cash flow stack up against its debt?
PPG has shrunken its total debt levels in the last twelve months, from UK£200k to UK£100k , which is mainly comprised of near term debt. With this reduction in debt, the current cash and short-term investment levels stands at UK£63k for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can examine some of PPG’s operating efficiency ratios such as ROA here.
Does PPG’s liquid assets cover its short-term commitments?
With current liabilities at UK£377k, the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.63x.
Is PPG’s debt level acceptable?
PPG’s level of debt is appropriate relative to its total equity, at 11%. This range is considered safe as PPG is not taking on too much debt obligation, which may be constraining for future growth. Risk around debt is very low for PPG, and the company also has the ability and headroom to increase debt if needed going forward.
Next Steps:
PPG’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven't considered other factors such as how PPG has been performing in the past. I recommend you continue to research Plutus PowerGen to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PPG’s future growth? Take a look at our free research report of analyst consensus for PPG’s outlook.
- Historical Performance: What has PPG's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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.
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