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How Financially Strong Is Performance Food Group Company (NYSE:PFGC)?

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Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Performance Food Group Company (NYSE:PFGC), with a market capitalization of US$4.1b, rarely draw their attention from the investing community. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. PFGC’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into PFGC here.

Check out our latest analysis for Performance Food Group

PFGC’s Debt (And Cash Flows)

PFGC has shrunk its total debt levels in the last twelve months, from US$1.4b to US$1.3b – this includes long-term debt. With this debt repayment, the current cash and short-term investment levels stands at US$7.5m to keep the business going. Additionally, PFGC has produced US$404m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 31%, indicating that PFGC’s debt is appropriately covered by operating cash.

Can PFGC meet its short-term obligations with the cash in hand?

With current liabilities at US$1.5b, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.57x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Consumer Retailing companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

NYSE:PFGC Historical Debt, April 2nd 2019
NYSE:PFGC Historical Debt, April 2nd 2019

Is PFGC’s debt level acceptable?

With total debt exceeding equity, PFGC is considered a highly levered company. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if PFGC’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 PFGC, the ratio of 4.45x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

Although PFGC’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around PFGC's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure PFGC has company-specific issues impacting its capital structure decisions. I recommend you continue to research Performance Food Group to get a more holistic view of the mid-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for PFGC’s future growth? Take a look at our free research report of analyst consensus for PFGC’s outlook.

  2. Valuation: What is PFGC 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 PFGC is currently mispriced by the market.

  3. 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.

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