Perma-Pipe International Holdings, Inc. (NASDAQ:PPIH) is a small-cap stock with a market capitalization of US$68m. 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? Given that PPIH is not presently profitable, it’s vital to assess the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. Though, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into PPIH here.
Does PPIH produce enough cash relative to debt?
PPIH’s debt levels surged from US$18m to US$22m over the last 12 months , which includes long-term debt. With this increase in debt, PPIH’s cash and short-term investments stands at US$9.6m , ready to deploy into the business. Moreover, PPIH has generated US$1.7m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 8.0%, indicating that PPIH’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency for unprofitable companies as traditional metrics such as return on asset (ROA) requires positive earnings. In PPIH’s case, it is able to generate 0.08x cash from its debt capital.
Does PPIH’s liquid assets cover its short-term commitments?
With current liabilities at US$41m, the company has been able to meet these obligations given the level of current assets of US$64m, with a current ratio of 1.58x. Generally, for Machinery 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.
Is PPIH’s debt level acceptable?
PPIH is a relatively highly levered company with a debt-to-equity of 43%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since PPIH is currently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Although PPIH’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how PPIH has been performing in the past. I suggest you continue to research Perma-Pipe International Holdings to get a more holistic view of the small-cap by looking at:
- Valuation: What is PPIH 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 PPIH is currently mispriced by the market.
- Historical Performance: What has PPIH’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 firstname.lastname@example.org.