While small-cap stocks, such as Pioneer Power Solutions, Inc. (NASDAQ:PPSI) with its market cap of US$44m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is essential, since poor capital management may bring about 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. Nevertheless, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into PPSI here.
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Does PPSI Produce Much Cash Relative To Its Debt?
PPSI's debt levels have fallen from US$31m to US$26m over the last 12 months , which also accounts for long term debt. With this debt repayment, PPSI's cash and short-term investments stands at US$7.7m to keep the business going. On top of this, PPSI has produced cash from operations of US$2.0m over the same time period, leading to an operating cash to total debt ratio of 7.7%, meaning that PPSI’s debt is not covered by operating cash.
Can PPSI meet its short-term obligations with the cash in hand?
At the current liabilities level of US$55m, it appears that the company has been able to meet these commitments with a current assets level of US$56m, leading to a 1.03x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Electrical companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is PPSI’s debt level acceptable?
Since total debt levels exceed equity, PPSI is a highly leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses.
PPSI’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 PPSI's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for PPSI's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Pioneer Power Solutions to get a better picture of the small-cap by looking at:
- Valuation: What is PPSI 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 PPSI is currently mispriced by the market.
- Historical Performance: What has PPSI'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.
- 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.
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If you spot an error that warrants correction, please contact the editor at email@example.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.