What Investors Should Know About PRGX Global, Inc.'s (NASDAQ:PRGX) Financial Strength

While small-cap stocks, such as PRGX Global, Inc. (NASDAQ:PRGX) with its market cap of US$206m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, this is not a comprehensive overview, so I’d encourage you to dig deeper yourself into PRGX here.

PRGX’s Debt (And Cash Flows)

PRGX has built up its total debt levels in the last twelve months, from US$14m to US$22m , which accounts for long term debt. With this growth in debt, the current cash and short-term investment levels stands at US$14m , ready to be used for running the business. Moreover, PRGX has generated US$2.4m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 11%, signalling that PRGX’s debt is not covered by operating cash.

Can PRGX meet its short-term obligations with the cash in hand?

With current liabilities at US$57m, it appears that the company has been able to meet these obligations given the level of current assets of US$65m, with a current ratio of 1.13x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for IT 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 PRGX’s debt level acceptable?

With a debt-to-equity ratio of 33%, PRGX's debt level may be seen as prudent. This range is considered safe as PRGX is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether PRGX 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 PRGX's, case, the ratio of 3.45x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as PRGX’s high interest coverage is seen as responsible and safe practice.

Next Steps:

PRGX’s high cash coverage and appropriate 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. Keep in mind I haven't considered other factors such as how PRGX has been performing in the past. I suggest you continue to research PRGX Global to get a more holistic view of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for PRGX’s future growth? Take a look at our free research report of analyst consensus for PRGX’s outlook.
2. Historical Performance: What has PRGX'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.
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.

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