What Investors Should Know About Pizza Pizza Royalty Corp’s (TSE:PZA) Financial Strength
Investors are always looking for growth in small-cap stocks like Pizza Pizza Royalty Corp (TSE:PZA), with a market cap of CA$315.1m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. However, this commentary is still very high-level, so I suggest you dig deeper yourself into PZA here.
How does PZA’s operating cash flow stack up against its debt?
Over the past year, PZA has maintained its debt levels at around CA$47.0m made up of current and long term debt. At this constant level of debt, PZA’s cash and short-term investments stands at CA$4.4m , ready to deploy into the business. Moreover, PZA has produced cash from operations of CA$28.1m during the same period of time, resulting in an operating cash to total debt ratio of 59.9%, meaning that PZA’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In PZA’s case, it is able to generate 0.6x cash from its debt capital.
Does PZA’s liquid assets cover its short-term commitments?
Looking at PZA’s most recent CA$3.2m liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.32x. Generally, for Hospitality companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is PZA’s debt level acceptable?
With a debt-to-equity ratio of 16.4%, PZA’s debt level may be seen as prudent. PZA is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if PZA’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For PZA, the ratio of 31.6x 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.
Next Steps:
PZA’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure PZA has company-specific issues impacting its capital structure decisions. I recommend you continue to research Pizza Pizza Royalty to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for PZA’s future growth? Take a look at our free research report of analyst consensus for PZA’s outlook.
Valuation: What is PZA 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 PZA 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 editorial-team@simplywallst.com.
