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Paragon Care Limited (ASX:PGC) is a small-cap stock with a market capitalization of AU$126.74M. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Companies operating in the Healthcare industry, even ones that are profitable, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is vital. I believe these basic checks tell most of the story you need to know. Though, this commentary is still very high-level, so I recommend you dig deeper yourself into PGC here.
Does PGC generate enough cash through operations?
Over the past year, PGC has maintained its debt levels at around AU$37.07M comprising of short- and long-term debt. At this constant level of debt, PGC’s cash and short-term investments stands at AU$18.56M for investing into the business. On top of this, PGC has produced AU$11.99M in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 32.34%, indicating that PGC’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In PGC’s case, it is able to generate 0.32x cash from its debt capital.
Does PGC’s liquid assets cover its short-term commitments?
With current liabilities at AU$46.28M, it seems that the business has been able to meet these commitments with a current assets level of AU$61.08M, leading to a 1.32x current account ratio. Usually, for Healthcare companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Does PGC face the risk of succumbing to its debt-load?
With debt reaching 61.38% of equity, PGC may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In PGC’s case, the ratio of 8.01x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Next Steps:
Although PGC’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 PGC’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 PGC has been performing in the past. I suggest you continue to research Paragon Care to get a better picture of the small-cap by looking at: