While small-cap stocks, such as Pharmagest Interactive SA (EPA:PHA) with its market cap of €807m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Healthcare Services industry, even ones that are profitable, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, I know these factors are very high-level, so I recommend you dig deeper yourself into PHA here.
How much cash does PHA generate through its operations?
PHA’s debt levels surged from €16m to €42m over the last 12 months – this includes both the current and long-term debt. With this growth in debt, the current cash and short-term investment levels stands at €68m , ready to deploy into the business. On top of this, PHA has generated €33m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 80%, signalling that PHA’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In PHA’s case, it is able to generate 0.8x cash from its debt capital.
Does PHA’s liquid assets cover its short-term commitments?
Looking at PHA’s most recent €71m liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.5x. Generally, for Healthcare Services companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Is PHA’s debt level acceptable?
PHA is a relatively highly levered company with a debt-to-equity of 42%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible.
Next Steps:
Although PHA’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around PHA’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how PHA has been performing in the past. I suggest you continue to research Pharmagest Interactive to get a more holistic view of the small-cap by looking at:
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Future Outlook: What are well-informed industry analysts predicting for PHA’s future growth? Take a look at our free research report of analyst consensus for PHA’s outlook.
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Valuation: What is PHA 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 PHA is currently mispriced by the market.
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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.