While small-cap stocks, such as PFSweb, Inc. (NASDAQ:PFSW) with its market cap of US$102m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. IT companies, even ones that are profitable, tend to be high risk. Assessing first and foremost the financial health is essential. Here are few basic financial health checks you should consider before taking the plunge. Though, I know these factors are very high-level, so I’d encourage you to 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$51m to US$43m , which includes long-term debt. With this debt repayment, PFSW currently has US$14m remaining in cash and short-term investments for investing into the business. Moreover, PFSW has produced US$20m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 46%, indicating that PFSW’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In PFSW’s case, it is able to generate 0.46x cash from its debt capital.
Does PFSW’s liquid assets cover its short-term commitments?
Looking at PFSW’s US$62m in current liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$81m, leading to a 1.31x current account ratio. For IT 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 PFSW’s debt level acceptable?
PFSW is a highly-leveraged company with debt exceeding equity by over 100%. 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 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 2.62x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
Next Steps:
PFSW’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. Since there is also no concerns around PFSW’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for PFSW’s financial health. Other important fundamentals need to be considered alongside. You should continue to research PFSweb to get a better picture of the small-cap by looking at:
- 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.
- 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.
- 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.