Presidio, Inc. (NASDAQ:PSDO) is a small-cap stock with a market capitalization of US$1.2b. 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. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, these checks don't give you a full picture, so I’d encourage you to dig deeper yourself into PSDO here.
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Does PSDO Produce Much Cash Relative To Its Debt?
PSDO's debt levels surged from US$885m to US$940m over the last 12 months , which includes long-term debt. With this growth in debt, PSDO's cash and short-term investments stands at US$29m to keep the business going. Moreover, PSDO has produced US$156m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 17%, indicating that PSDO’s debt is not covered by operating cash.
Does PSDO’s liquid assets cover its short-term commitments?
At the current liabilities level of US$1.0b, it appears that the company has been able to meet these obligations given the level of current assets of US$1.1b, with a current ratio of 1.05x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for IT companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is PSDO’s debt level acceptable?
Since total debt levels exceed equity, PSDO is a highly leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether PSDO 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 PSDO's, case, the ratio of 2.68x 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.
Although PSDO’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 PSDO'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 PSDO has company-specific issues impacting its capital structure decisions. I recommend you continue to research Presidio to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PSDO’s future growth? Take a look at our free research report of analyst consensus for PSDO’s outlook.
- Valuation: What is PSDO 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 PSDO 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.
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