What does Playa Hotels & Resorts NV’s (NASDAQ:PLYA) Balance Sheet Tell Us About Its Future?
Investors are always looking for growth in small-cap stocks like Playa Hotels & Resorts NV (NASDAQ:PLYA), with a market cap of US$1.20b. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into PLYA here.
How does PLYA’s operating cash flow stack up against its debt?
PLYA’s debt levels surged from US$879.5m to US$997.5m over the last 12 months – this includes both the current and long-term debt. With this growth in debt, PLYA’s cash and short-term investments stands at US$145.9m , ready to deploy into the business. On top of this, PLYA has generated cash from operations of US$71.9m in the last twelve months, resulting in an operating cash to total debt ratio of 7.2%, signalling that PLYA’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In PLYA’s case, it is able to generate 0.072x cash from its debt capital.
Can PLYA meet its short-term obligations with the cash in hand?
With current liabilities at US$106.4m, it seems that the business has been able to meet these obligations given the level of current assets of US$254.7m, with a current ratio of 2.39x. For Hospitality companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is PLYA’s debt level acceptable?
With total debt exceeding equities, PLYA 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 test if PLYA’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For PLYA, the ratio of 1.61x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
Next Steps:
PLYA’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for PLYA’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Playa Hotels & Resorts to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for PLYA’s future growth? Take a look at our free research report of analyst consensus for PLYA’s outlook.
Valuation: What is PLYA 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 PLYA 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.
