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What You Should Know About Patrick Industries, Inc.'s (NASDAQ:PATK) Financial Strength

Simply Wall St

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Patrick Industries, Inc. (NASDAQ:PATK) is a small-cap stock with a market capitalization of US$1.1b. 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? Understanding the company's financial health becomes crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, this is just a partial view of the stock, and I’d encourage you to dig deeper yourself into PATK here.

Does PATK Produce Much Cash Relative To Its Debt?

PATK has built up its total debt levels in the last twelve months, from US$429m to US$708m – this includes long-term debt. With this increase in debt, the current cash and short-term investment levels stands at US$8.5m , ready to be used for running the business. Moreover, PATK has produced cash from operations of US$202m during the same period of time, leading to an operating cash to total debt ratio of 29%, meaning that PATK’s debt is appropriately covered by operating cash.

Can PATK pay its short-term liabilities?

With current liabilities at US$218m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.97x. The current ratio is calculated by dividing current assets by current liabilities. For Building 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.

NasdaqGS:PATK Historical Debt, July 17th 2019

Can PATK service its debt comfortably?

Since total debt levels exceed equity, PATK is a highly leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can test if PATK’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 PATK, the ratio of 5.56x suggests that interest is appropriately 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:

Although PATK’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. Keep in mind I haven't considered other factors such as how PATK has been performing in the past. You should continue to research Patrick Industries to get a more holistic view of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for PATK’s future growth? Take a look at our free research report of analyst consensus for PATK’s outlook.
  2. Valuation: What is PATK 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 PATK is currently mispriced by the market.
  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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.