Pope Resources A Delaware Limited Partnership (NASDAQ:POPE) is a small-cap stock with a market capitalization of US$299.61M. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Assessing first and foremost the financial health is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, this commentary is still very high-level, so I suggest you dig deeper yourself into POPE here.
How does POPE’s operating cash flow stack up against its debt?
Over the past year, POPE has maintained its debt levels at around US$127.45M – this includes both the current and long-term debt. At this constant level of debt, POPE currently has US$3.42M remaining in cash and short-term investments , ready to deploy into the business. Additionally, POPE has generated US$31.98M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 25.09%, signalling that POPE’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In POPE’s case, it is able to generate 0.25x cash from its debt capital.
Can POPE pay its short-term liabilities?
Looking at POPE’s most recent US$9.76M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$18.03M, with a current ratio of 1.85x. For Forestry companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Is POPE’s debt level acceptable?
POPE is a relatively highly levered company with a debt-to-equity of 52.97%. 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 POPE 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 POPE’s, case, the ratio of 3.92x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving POPE ample headroom to grow its debt facilities.
POPE’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. This is only a rough assessment of financial health, and I’m sure POPE has company-specific issues impacting its capital structure decisions. I suggest you continue to research Pope Resources A Delaware Limited Partnership to get a more holistic view of the small-cap by looking at:
- 1. Valuation: What is POPE 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 POPE is currently mispriced by the market.
- 2. Historical Performance: What has POPE’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.
- 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.
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.