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What Investors Should Know About PCM Inc’s (NASDAQ:PCMI) Financial Strength

Scott Perkins

Investors are always looking for growth in small-cap stocks like PCM Inc (NASDAQ:PCMI), with a market cap of US$279.51m. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Electronic industry, even ones that are profitable, are inclined towards being higher risk. Assessing first and foremost the financial health is vital. I believe these basic checks tell most of the story you need to know. Though, since I only look at basic financial figures, I suggest you dig deeper yourself into PCMI here.

How does PCMI’s operating cash flow stack up against its debt?

PCMI’s debt levels surged from US$142.98m to US$183.91m over the last 12 months – this includes both the current and long-term debt. With this rise in debt, PCMI’s cash and short-term investments stands at US$11.50m , ready to deploy into the business. Moreover, PCMI has produced US$1.29m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 0.70%, indicating that PCMI’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In PCMI’s case, it is able to generate 0.007x cash from its debt capital.

Does PCMI’s liquid assets cover its short-term commitments?

With current liabilities at US$613.27m, it appears that the company has been able to meet these obligations given the level of current assets of US$621.26m, with a current ratio of 1.01x. 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.

NasdaqGM:PCMI Historical Debt August 17th 18

Is PCMI’s debt level acceptable?

PCMI is a highly-leveraged company with debt exceeding equity by over 100%. 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 2.69x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.

Next Steps:

At its current level of cash flow coverage, PCMI has room for improvement to better cushion for events which may require debt repayment. Though, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure PCMI has company-specific issues impacting its capital structure decisions. You should continue to research PCM to get a better picture of the stock by looking at:

  1. 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.
  2. Historical Performance: What has PCMI’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 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 editorial-team@simplywallst.com.