Investors are always looking for growth in small-cap stocks like Probiotec Limited (ASX:PBP), with a market cap of AU$59.00M. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Pharmaceuticals industry, even ones that are profitable, tend to be high risk. Evaluating financial health as part of your investment thesis is essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, this commentary is still very high-level, so I suggest you dig deeper yourself into PBP here.
How does PBP’s operating cash flow stack up against its debt?
Over the past year, PBP has maintained its debt levels at around AU$7.45M comprising of short- and long-term debt. At this constant level of debt, PBP’s cash and short-term investments stands at AU$321.62K for investing into the business. On top of this, PBP has produced AU$4.09M in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 54.86%, meaning that PBP’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 PBP’s case, it is able to generate 0.55x cash from its debt capital.
Can PBP meet its short-term obligations with the cash in hand?
Looking at PBP’s most recent AU$16.08M liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.33x. For Pharmaceuticals companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does PBP face the risk of succumbing to its debt-load?
PBP’s level of debt is appropriate relative to its total equity, at 27.13%. This range is considered safe as PBP is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether PBP 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 PBP’s, case, the ratio of 9.68x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving PBP ample headroom to grow its debt facilities.
Next Steps:
PBP has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for PBP’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Probiotec to get a more holistic view of the stock by looking at: