What You Must Know About Patterson Companies, Inc.'s (NASDAQ:PDCO) Financial Strength
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Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as Patterson Companies, Inc. (NASDAQ:PDCO) with a market-capitalization of US$2.2b, rarely draw their attention. However, history shows that overlooked mid-cap companies have performed better on a risk-adjusted manner than the smaller and larger segment of the market. This article will examine PDCO’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into PDCO here.
See our latest analysis for Patterson Companies
Does PDCO Produce Much Cash Relative To Its Debt?
PDCO's debt levels have fallen from US$1.2b to US$785m over the last 12 months – this includes long-term debt. With this debt payback, PDCO's cash and short-term investments stands at US$117m to keep the business going. On top of this, PDCO has generated US$215m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 27%, meaning that PDCO’s current level of operating cash is high enough to cover debt.
Can PDCO meet its short-term obligations with the cash in hand?
At the current liabilities level of US$933m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.8x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Healthcare companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Does PDCO face the risk of succumbing to its debt-load?
PDCO is a relatively highly levered company with a debt-to-equity of 53%. This is not unusual for mid-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 PDCO's case, the ratio of 3.14x 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 PDCO’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. This is only a rough assessment of financial health, and I'm sure PDCO has company-specific issues impacting its capital structure decisions. I recommend you continue to research Patterson Companies to get a more holistic view of the mid-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for PDCO’s future growth? Take a look at our free research report of analyst consensus for PDCO’s outlook.
Valuation: What is PDCO 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 PDCO 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.
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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.
