What does PFSweb Inc’s (NASDAQ:PFSW) Balance Sheet Tell Us About Its Future?

PFSweb Inc (NASDAQ:PFSW) is a small-cap stock with a market capitalization of US$161.2m. 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? Companies operating in the IT industry, even ones that are profitable, tend to be high risk. Evaluating financial health as part of your investment thesis is vital. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, this commentary is still very high-level, so I suggest you dig deeper yourself into PFSW here.

How much cash does PFSW generate through its operations?

PFSW has shrunken its total debt levels in the last twelve months, from US$53.7m to US$45.9m , which is made up of current and long term debt. With this debt repayment, PFSW currently has US$13.6m remaining in cash and short-term investments , ready to deploy into the business. Additionally, PFSW has produced US$10.3m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 22.5%, signalling that PFSW’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In PFSW’s case, it is able to generate 0.23x cash from its debt capital.

Can PFSW pay its short-term liabilities?

Looking at PFSW’s most recent US$64.4m liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$83.8m, with a current ratio of 1.3x. Usually, for IT companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

NasdaqCM:PFSW Historical Debt August 26th 18
NasdaqCM:PFSW Historical Debt August 26th 18

Is PFSW’s debt level acceptable?

Since total debt levels have outpaced equities, PFSW is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if PFSW’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 PFSW, the ratio of 2.64x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.

Next Steps:

PFSW’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure PFSW has company-specific issues impacting its capital structure decisions. I suggest you continue to research PFSweb to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for PFSW’s future growth? Take a look at our free research report of analyst consensus for PFSW’s outlook.
  2. Valuation: What is PFSW 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 PFSW is currently mispriced by the market.
  3. 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.