How Financially Strong Is Performant Financial Corporation (NASDAQ:PFMT)?
Investors are always looking for growth in small-cap stocks like Performant Financial Corporation (NASDAQ:PFMT), with a market cap of US$119m. However, an important fact which most ignore is: how financially healthy is the business? Since PFMT is loss-making right now, it’s crucial to evaluate the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, since I only look at basic financial figures, I suggest you dig deeper yourself into PFMT here.
How much cash does PFMT generate through its operations?
PFMT’s debt level has been constant at around US$40m over the previous year including long-term debt. At this current level of debt, PFMT’s cash and short-term investments stands at US$5.7m for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can take a look at some of PFMT’s operating efficiency ratios such as ROA here.
Does PFMT’s liquid assets cover its short-term commitments?
At the current liabilities level of US$18m, the company has been able to meet these commitments with a current assets level of US$32m, leading to a 1.81x current account ratio. Usually, for Commercial Services 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 PFMT service its debt comfortably?
With a debt-to-equity ratio of 49%, PFMT can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since PFMT is currently 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.
Next Steps:
Although PFMT’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure PFMT has company-specific issues impacting its capital structure decisions. I recommend you continue to research Performant Financial to get a more holistic view of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for PFMT’s future growth? Take a look at our free research report of analyst consensus for PFMT’s outlook.
Historical Performance: What has PFMT’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
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.
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