Investors are always looking for growth in small-cap stocks like PriceSmart, Inc. (NASDAQ:PSMT), with a market cap of US$1.8b. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Consumer Retailing industry facing headwinds from current disruption, even ones that are profitable, are inclined towards being higher risk. Assessing first and foremost the financial health is crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, I know these factors are very high-level, so I suggest you dig deeper yourself into PSMT here.
How much cash does PSMT generate through its operations?
Over the past year, PSMT has maintained its debt levels at around US$103m including long-term debt. At this stable level of debt, the current cash and short-term investment levels stands at US$126m for investing into the business. Additionally, PSMT has generated US$119m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 116%, meaning that PSMT’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In PSMT’s case, it is able to generate 1.16x cash from its debt capital.
Can PSMT meet its short-term obligations with the cash in hand?
At the current liabilities level of US$349m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.4x. For Consumer Retailing companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Does PSMT face the risk of succumbing to its debt-load?
PSMT’s level of debt is appropriate relative to its total equity, at 14%. PSMT is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether PSMT 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 PSMT’s, case, the ratio of 35.83x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as PSMT’s high interest coverage is seen as responsible and safe practice.
PSMT’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for PSMT’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research PriceSmart to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PSMT’s future growth? Take a look at our free research report of analyst consensus for PSMT’s outlook.
- Valuation: What is PSMT 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 PSMT 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.