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While small-cap stocks, such as Plasma System S.A. (WSE:PSM) with its market cap of zł2.3m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that PSM is not presently profitable, it’s crucial to evaluate the current state of its operations and pathway to profitability. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, this is just a partial view of the stock, and I suggest you dig deeper yourself into PSM here.
Does PSM Produce Much Cash Relative To Its Debt?
PSM's debt level has been constant at around zł13m over the previous year – this includes long-term debt. At this constant level of debt, PSM currently has zł68k remaining in cash and short-term investments , ready to be used for running the business. Its negative operating cash flow means calculating cash-to-debt wouldn't be useful. For this article’s sake, I won’t be looking at this today, but you can assess some of PSM’s operating efficiency ratios such as ROA here.
Can PSM pay its short-term liabilities?
At the current liabilities level of zł18m, the company may not have an easy time meeting these commitments with a current assets level of zł3.8m, leading to a current ratio of 0.21x. The current ratio is calculated by dividing current assets by current liabilities.
Does PSM face the risk of succumbing to its debt-load?
PSM is a relatively highly levered company with a debt-to-equity of 70%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. But since PSM is presently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
Although PSM’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. But, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven't considered other factors such as how PSM has been performing in the past. You should continue to research Plasma System to get a better picture of the stock by looking at:
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Historical Performance: What has PSM'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.
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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.
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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.