While small-cap stocks, such as PriceSmart, Inc. (NASDAQ:PSMT) with its market cap of US$1.9b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Consumer Retailing industry facing headwinds from current disruption, even ones that are profitable, tend to be high risk. Evaluating financial health as part of your investment thesis is crucial. Here are few basic financial health checks you should consider before taking the plunge. Though, this commentary is still very high-level, so I suggest you dig deeper yourself into PSMT here.
How does PSMT’s operating cash flow stack up against its debt?
PSMT has sustained its debt level by about US$100m over the last 12 months – this includes long-term debt. At this stable level of debt, PSMT’s cash and short-term investments stands at US$107m for investing into the business. Additionally, PSMT has generated US$155m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 156%, signalling that PSMT’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In PSMT’s case, it is able to generate 1.56x cash from its debt capital.
Does PSMT’s liquid assets cover its short-term commitments?
At the current liabilities level of US$411m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.3x. Usually, for Consumer Retailing companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Is PSMT’s debt level acceptable?
With a debt-to-equity ratio of 13%, PSMT’s debt level may be seen as prudent. This range is considered safe as PSMT is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether PSMT 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 PSMT’s, case, the ratio of 36.68x suggests that interest is comfortably 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.
PSMT has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, 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 PSMT’s financial health. Other important fundamentals need to be considered alongside. You should continue to research PriceSmart to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PSMT’s future growth? Take a look at our free research report of analyst consensus for PSMT’s outlook.
- Valuation: What is PSMT 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 PSMT 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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