While small-cap stocks, such as Perseus SA (ATH:PERS) with its market cap of €17m, 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 essential, 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. However, this commentary is still very high-level, so I recommend you dig deeper yourself into PERS here.
How does PERS’s operating cash flow stack up against its debt?
PERS’s debt levels have fallen from €29m to €22m over the last 12 months – this includes long-term debt. With this reduction in debt, PERS currently has €10m remaining in cash and short-term investments , ready to deploy into the business. On top of this, PERS has generated €10m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 45%, signalling that PERS’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 PERS’s case, it is able to generate 0.45x cash from its debt capital.
Can PERS pay its short-term liabilities?
At the current liabilities level of €18m, it seems that the business has been able to meet these commitments with a current assets level of €50m, leading to a 2.75x current account ratio. Usually, for Food companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Does PERS face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 95%, PERS can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if PERS’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For PERS, the ratio of 4.83x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving PERS ample headroom to grow its debt facilities.
PERS’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 PERS’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure PERS has company-specific issues impacting its capital structure decisions. I recommend you continue to research Perseus to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PERS’s future growth? Take a look at our free research report of analyst consensus for PERS’s outlook.
- Valuation: What is PERS 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 PERS 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.