Does Pittards plc’s (AIM:PTD) Debt Level Pose A Serious Problem?
While small-cap stocks, such as Pittards plc (AIM:PTD) with its market cap of GBP £12.55M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. There are always disruptions which destabilize an existing industry, in which most small-cap companies are the first casualties. Thus, it becomes utmost important for an investor to test a company’s resilience for such contingencies. In simple terms, I believe these three small calculations tell most of the story you need to know. Check out our latest analysis for Pittards
Does PTD generate enough cash through operations?
Unxpected adverse events, such as natural disasters and wars, can be a true test of a company’s capacity to meet its obligations. These catastrophes does not mean the company can stop servicing its debt obligations. Fortunately, we can test the company’s capacity to pay back its debtholders without summoning any catastrophes by looking at how much cash it generates from its current operations. PTD’s recent operating cash flow was -0.03 times its debt within the past year. This means what PTD can generate on an annual basis, which is currently a negative value, does not cover what it actually owes its debtors in the near term. This raises a red flag, looking at PTD’s operations at this point in time.
Can PTD pay its short-term liabilities?
In addition to debtholders, a company must be able to pay its bills and salaries to keep the business running. In times of adverse events, PTD may need to liquidate its short-term assets to pay these immediate obligations. We should examine if the company’s cash and short-term investment levels match its current liabilities. Our analysis shows that PTD does have enough liquid assets on hand to meet its upcoming liabilities, which lowers our concerns should adverse events arise.
Is PTD’s level of debt at an acceptable level?
While ideally the debt-to equity ratio of a financially healthy company should be less than 40%, several factors such as industry life-cycle and economic conditions can result in a company raising a significant amount of debt. For PTD, the debt-to-equity ratio is 46.38%, which means, while the company’s debt could pose a problem for its earnings stability, it is not at an alarmingly high level yet. While debt-to-equity ratio has several factors at play, an easier way to check whether PTD’s leverage is at a sustainable level is to check its ability to service the debt. A company generating earnings at least three times its interest payments is considered financially sound. PTD’s interest on debt is not strongly covered by earnings as it sits at around 0.83x. Debtors may be less inclined to loan the company more money, giving PTD less headroom for growth through debt.
Next Steps:
Are you a shareholder? PTD’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Given that its financial position may be different. You should always be keeping on top of market expectations for PTD’s future growth on our free analysis platform.
Are you a potential investor? Although near-term liquidity isn’t an issue, PTD’s large debt ratio along with low cash coverage of debt may not build the strongest investment case. But, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of PTD’s track record. I encourage you to continue your research by taking a look at PTD’s past performance analysis on our free platform to figure out PTD’s financial health position.
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.
