Investors are always looking for growth in small-cap stocks like Perseus SA (ATH:PERS), with a market cap of €16m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company’s balance sheet strength. However, these checks don’t give you a full picture, so I’d encourage you to dig deeper yourself into PERS here.
Does PERS Produce Much Cash Relative To Its Debt?
PERS has shrunk its total debt levels in the last twelve months, from €23m to €20m , which includes long-term debt. With this debt repayment, PERS currently has €9.3m remaining in cash and short-term investments to keep the business going. Moreover, PERS has produced cash from operations of €9.4m over the same time period, resulting in an operating cash to total debt ratio of 46%, indicating that PERS’s debt is appropriately covered by operating cash.
Can PERS pay its short-term liabilities?
With current liabilities at €23m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.41x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Food companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does PERS face the risk of succumbing to its debt-load?
With debt reaching 83% of equity, PERS may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can check to see whether PERS 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 PERS’s, case, the ratio of 9.93x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as PERS’s high interest coverage is seen as responsible and safe practice.
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. Keep in mind I haven’t considered other factors such as how PERS has been performing in the past. I recommend you continue to research Perseus to get a more holistic view 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.
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