Phibro Animal Health Corporation (NASDAQ:PAHC) is a small-cap stock with a market capitalization of US$1.92b. 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? Pharmaceuticals companies, even ones that are profitable, tend to be high risk. Assessing first and foremost the financial health is crucial. Here are few basic financial health checks you should consider before taking the plunge. However, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into PAHC here.
How much cash does PAHC generate through its operations?
PAHC has shrunken its total debt levels in the last twelve months, from US$350.17m to US$313.14m – this includes both the current and long-term debt. With this debt payback, PAHC currently has US$56.08m remaining in cash and short-term investments for investing into the business. Additionally, PAHC has produced US$98.39m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 31.42%, indicating that PAHC’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 PAHC’s case, it is able to generate 0.31x cash from its debt capital.
Can PAHC meet its short-term obligations with the cash in hand?
With current liabilities at US$115.80m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.14x. However, anything above 3x is considered high and could mean that PAHC has too much idle capital in low-earning investments.
Is PAHC’s debt level acceptable?
With total debt exceeding equities, PAHC is considered a highly levered company. 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 PAHC 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 PAHC’s, case, the ratio of 7.97x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving PAHC ample headroom to grow its debt facilities.
PAHC’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. Since there is also no concerns around PAHC’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how PAHC has been performing in the past. You should continue to research Phibro Animal Health to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PAHC’s future growth? Take a look at our free research report of analyst consensus for PAHC’s outlook.
- Valuation: What is PAHC 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 PAHC 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 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.