PGT Innovations Inc (NYSE:PGTI) is a small-cap stock with a market capitalization of US$1.1b. 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, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. However, since I only look at basic financial figures, I suggest you dig deeper yourself into PGTI here.
Does PGTI produce enough cash relative to debt?
PGTI’s debt levels have fallen from US$249m to US$215m over the last 12 months , which is made up of current and long term debt. With this reduction in debt, the current cash and short-term investment levels stands at US$64m for investing into the business. On top of this, PGTI has produced cash from operations of US$72m over the same time period, leading to an operating cash to total debt ratio of 33%, signalling that PGTI’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In PGTI’s case, it is able to generate 0.33x cash from its debt capital.
Can PGTI pay its short-term liabilities?
Looking at PGTI’s most recent US$46m liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$196m, with a current ratio of 4.24x. Having said that, a ratio greater than 3x may be considered as quite high, and some might argue PGTI could be holding too much capital in a low-return investment environment.
Does PGTI face the risk of succumbing to its debt-load?
Since total debt levels have outpaced equities, PGTI is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In PGTI’s case, the ratio of 4.24x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as PGTI’s high interest coverage is seen as responsible and safe practice.
PGTI’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure PGTI has company-specific issues impacting its capital structure decisions. I suggest you continue to research Innovations to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PGTI’s future growth? Take a look at our free research report of analyst consensus for PGTI’s outlook.
- Valuation: What is PGTI 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 PGTI 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 firstname.lastname@example.org.