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Investors are always looking for growth in small-cap stocks like PCM, Inc. (NASDAQ:PCMI), with a market cap of US$296m. However, an important fact which most ignore is: how financially healthy is the business? Electronic companies, even ones that are profitable, tend to be high risk. So, understanding the company’s financial health becomes crucial. I believe these basic checks tell most of the story you need to know. Nevertheless, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into PCMI here.
Does PCMI produce enough cash relative to debt?
PCMI’s debt levels have fallen from US$206m to US$168m over the last 12 months – this includes long-term debt. With this debt repayment, PCMI currently has US$8.5m remaining in cash and short-term investments , ready to deploy into the business. Additionally, PCMI has generated US$53m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 31%, signalling that PCMI’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 PCMI’s case, it is able to generate 0.31x cash from its debt capital.
Does PCMI’s liquid assets cover its short-term commitments?
Looking at PCMI’s US$516m in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$533m, leading to a 1.03x current account ratio. For Electronic companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does PCMI face the risk of succumbing to its debt-load?
Since total debt levels have outpaced equities, PCMI is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In PCMI’s case, the ratio of 3.57x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving PCMI ample headroom to grow its debt facilities.
Although PCMI’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. I admit this is a fairly basic analysis for PCMI’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research PCM to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PCMI’s future growth? Take a look at our free research report of analyst consensus for PCMI’s outlook.
- Valuation: What is PCMI 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 PCMI 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.
To help readers see past 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. For errors that warrant correction please contact the editor at email@example.com.