While small-cap stocks, such as Patrick Industries Inc (NASDAQ:PATK) with its market cap of US$1.59b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into PATK here.
Does PATK produce enough cash relative to debt?
PATK has built up its total debt levels in the last twelve months, from US$260.2m to US$582.5m – this includes both the current and long-term debt. With this rise in debt, the current cash and short-term investment levels stands at US$104.0k for investing into the business. Additionally, PATK has generated cash from operations of US$171.4m in the last twelve months, leading to an operating cash to total debt ratio of 29.4%, indicating that PATK’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 PATK’s case, it is able to generate 0.29x cash from its debt capital.
Can PATK meet its short-term obligations with the cash in hand?
At the current liabilities level of US$172.6m liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.23x. Generally, for Building companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does PATK face the risk of succumbing to its debt-load?
With total debt exceeding equities, PATK is considered a highly levered company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether PATK 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 PATK’s, case, the ratio of 10.33x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving PATK ample headroom to grow its debt facilities.
PATK’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how PATK has been performing in the past. You should continue to research Patrick Industries to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PATK’s future growth? Take a look at our free research report of analyst consensus for PATK’s outlook.
- Valuation: What is PATK 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 PATK is currently mispriced by the market.
- 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 email@example.com.