While small-cap stocks, such as Performant Financial Corporation (NASDAQ:PFMT) with its market cap of US$136.07M, 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 PFMT is loss-making right now, it’s essential to understand the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into PFMT here.
Does PFMT generate an acceptable amount of cash through operations?
PFMT’s debt levels have fallen from US$92.14M to US$53.62M over the last 12 months – this includes both the current and long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at US$32.98M for investing into the business. Moreover, PFMT has produced US$17.78M in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 33.17%, indicating that PFMT’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency for unprofitable companies as traditional metrics such as return on asset (ROA) requires a positive net income. In PFMT’s case, it is able to generate 0.33x cash from its debt capital.
Can PFMT meet its short-term obligations with the cash in hand?
At the current liabilities level of US$51.47M liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.4x. Usually, for Commercial Services companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does PFMT face the risk of succumbing to its debt-load?
With debt reaching 51.01% of equity, PFMT may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. However, since PFMT is presently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
PFMT’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 PFMT has been performing in the past. I suggest you continue to research Performant Financial to get a more holistic view of the small-cap by looking at the areas below. Just a heads up – to access some parts of the Simply Wall St research tool you might be asked to create a free account, but it takes just one click and the information they provide is definitely worth it in my opinion.
- 1. Future Outlook: What are well-informed industry analysts predicting for PFMT’s future growth? Take a look at this free research report of analyst consensus for PFMT’s outlook.
- 2. Valuation: What is PFMT worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in this free research report helps visualize whether PFMT is currently mispriced by the market.
- 3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore a free list of these great stocks here.
To help readers see pass 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.