PCC Exol SA (WSE:PCX) is a small-cap stock with a market capitalization of zł262m. 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? Assessing first and foremost the financial health is vital, since poor capital management may bring about 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. Nevertheless, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into PCX here.
Does PCX produce enough cash relative to debt?
PCX has built up its total debt levels in the last twelve months, from zł169m to zł200m – this includes both the current and long-term debt. With this rise in debt, PCX’s cash and short-term investments stands at zł19m , ready to deploy into the business. On top of this, PCX has produced zł35m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 18%, meaning that PCX’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In PCX’s case, it is able to generate 0.18x cash from its debt capital.
Does PCX’s liquid assets cover its short-term commitments?
Looking at PCX’s most recent zł127m liabilities, the company has been able to meet these commitments with a current assets level of zł169m, leading to a 1.33x current account ratio. For Chemicals companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is PCX’s debt level acceptable?
With debt reaching 83% of equity, PCX 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 test if PCX’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 PCX, the ratio of 3.48x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as PCX’s high interest coverage is seen as responsible and safe practice.
Next Steps:
PCX’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure PCX has company-specific issues impacting its capital structure decisions. I suggest you continue to research PCC Exol to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PCX’s future growth? Take a look at our free research report of analyst consensus for PCX’s outlook.
- Historical Performance: What has PCX’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.
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 editorial-team@simplywallst.com.