What does Piquadro SpA’s (BIT:PQ) Balance Sheet Tell Us About Its Future?
Investors are always looking for growth in small-cap stocks like Piquadro SpA (BIT:PQ), with a market cap of €86m. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into PQ here.
How does PQ’s operating cash flow stack up against its debt?
PQ’s debt levels surged from €21m to €24m over the last 12 months , which is made up of current and long term debt. With this increase in debt, PQ currently has €24m remaining in cash and short-term investments , ready to deploy into the business. On top of this, PQ has generated cash from operations of €8m in the last twelve months, leading to an operating cash to total debt ratio of 33%, indicating that PQ’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 PQ’s case, it is able to generate 0.33x cash from its debt capital.
Does PQ’s liquid assets cover its short-term commitments?
At the current liabilities level of €42m liabilities, the company has been able to meet these commitments with a current assets level of €77m, leading to a 1.83x current account ratio. Usually, for Luxury companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can PQ service its debt comfortably?
With debt reaching 60% of equity, PQ 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. We can check to see whether PQ 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 PQ’s, case, the ratio of 33.44x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving PQ ample headroom to grow its debt facilities.
Next Steps:
PQ’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 PQ has been performing in the past. I suggest you continue to research Piquadro to get a better picture of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for PQ’s future growth? Take a look at our free research report of analyst consensus for PQ’s outlook.
Valuation: What is PQ 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 PQ 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 editorial-team@simplywallst.com.
