While small-cap stocks, such as PS&C Limited (ASX:PSZ) with its market cap of AU$29.6m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since PSZ is loss-making right now, it’s vital to assess the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into PSZ here.
How does PSZ’s operating cash flow stack up against its debt?
PSZ’s debt levels have fallen from AU$15.4m to AU$12.9m over the last 12 months , which is mainly comprised of near term debt. With this debt repayment, the current cash and short-term investment levels stands at AU$4.7m , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can examine some of PSZ’s operating efficiency ratios such as ROA here.
Does PSZ’s liquid assets cover its short-term commitments?
Looking at PSZ’s most recent AU$37.5m liabilities, it seems that the business may not be able to easily meet these obligations given the level of current assets of AU$22.4m, with a current ratio of 0.6x.
Can PSZ service its debt comfortably?
PSZ’s level of debt is appropriate relative to its total equity, at 15.9%. This range is considered safe as PSZ is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. Investors’ risk associated with debt is very low with PSZ, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Next Steps:
PSZ’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. Furthermore, its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for PSZ’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research PS&C to get a better picture of the stock by looking at:
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Future Outlook: What are well-informed industry analysts predicting for PSZ’s future growth? Take a look at our free research report of analyst consensus for PSZ’s outlook.
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Valuation: What is PSZ 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 PSZ 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.