What does PCM, Inc.’s (NASDAQ:PCMI) Balance Sheet Tell Us About Its Future?

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PCM, Inc. (NASDAQ:PCMI) is a small-cap stock with a market capitalization of US$381m. 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 Electronic industry, even ones that are profitable, are inclined towards being higher risk. So, understanding the company’s financial health becomes vital. Here are few basic financial health checks you should consider before taking the plunge. However, I know these factors are very high-level, so I recommend you dig deeper yourself into PCMI here.

How does PCMI’s operating cash flow stack up against its debt?

PCMI has shrunken its total debt levels in the last twelve months, from US$252m to US$121m , which includes long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at US$6.0m for investing into the business. On top of this, PCMI has generated cash from operations of US$134m during the same period of time, resulting in an operating cash to total debt ratio of 110%, meaning that PCMI’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In PCMI’s case, it is able to generate 1.1x cash from its debt capital.

Can PCMI pay its short-term liabilities?

At the current liabilities level of US$520m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.04x. For Electronic companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

NASDAQGM:PCMI Historical Debt February 14th 19
NASDAQGM:PCMI Historical Debt February 14th 19

Does PCMI face the risk of succumbing to its debt-load?

PCMI is a relatively highly levered company with a debt-to-equity of 79%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether PCMI 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 PCMI’s, case, the ratio of 4.18x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as PCMI’s high interest coverage is seen as responsible and safe practice.

Next Steps:

PCMI’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. Keep in mind I haven’t considered other factors such as how PCMI has been performing in the past. You should continue to research PCM to get a more holistic view of the small-cap by looking at:

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