While small-cap stocks, such as Primary Health Care Limited (ASX:PRY) with its market cap of $1.80B, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. There are always disruptions which destabilize an existing industry, in which most small-cap companies are the first casualties. Here are few basic financial health checks to judge whether a company fits the bill or there is an additional risk which you should consider before taking the plunge. Check out our latest analysis for Primary Health Care
Does PRY generate enough cash through operations?
Unxpected adverse events, such as natural disasters and wars, can be a true test of a company’s capacity to meet its obligations.These adverse events bring devastation and yet does not absolve the company from its debts.Can PRY pay off what it owes to its debtholder by using only cash from its operational activities? PRY’s recent operating cash flow was 0.24 times its debt within the past year. A ratio of over 0.1x shows that PRY is generating adequate cash from its core business, which should increase its potential to pay back near-term debt.
Can PRY pay its short-term liabilities?
What about its other commitments such as payments to suppliers and salaries to its employees? In times of adverse events, PRY may need to liquidate its short-term assets to pay these immediate obligations. We should examine if the company’s cash and short-term investment levels match its current liabilities. Our analysis shows that PRY is unable to meet all of its upcoming commitments with its cash and other short-term assets. While this is not abnormal for companies, as their cash is better invested in the business or returned to investors than lying around, it does bring about some concerns should any unfavourable circumstances arise.
Is PRY’s level of debt at an acceptable level?
Debt-to-equity ratio tells us how much of the asset debtors could claim if the company went out of business. For PRY, the debt-to-equity ratio is 47.11%, which means, while the company’s debt could pose a problem for its earnings stability, it is not at an alarmingly high level yet. We can test if PRY’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings should cover interest by at least three times, therefore reducing concerns when profit is highly volatile. PRY’s profits only covers interest 2.72 times, which is deemed as inadequate. Debtors may be less inclined to loan the company more money, giving PRY less headroom for growth through debt.
PRY’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. In addition to this, the company may not be able to pay all of its upcoming liabilities from its current short-term assets. Now that you know to keep debt in mind when putting together your investment thesis, I recommend you check out our latest free analysis report on Primary Health Care to see what other factors for PRY you should consider.
PS. If you are not interested in Primary Health Care anymore, you can use our free platform to see my list of over 150 other stocks with a high growth potential.
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