While small-cap stocks, such as Pelatro Plc (AIM:PTRO) with its market cap of UK£19.57M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Software industry, even ones that are profitable, are more likely to be higher 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, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into PTRO here.
Does PTRO generate enough cash through operations?
In the previous 12 months, PTRO’s rose by about US$1.04M comprising of short- and long-term debt. With this ramp up in debt, PTRO currently has US$4.13M remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of PTRO’s operating efficiency ratios such as ROA here.
Can PTRO meet its short-term obligations with the cash in hand?
Looking at PTRO’s most recent US$1.25M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$6.12M, with a current ratio of 4.9x. However, anything above 3x is considered high and could mean that PTRO has too much idle capital in low-earning investments.
Is PTRO’s debt level acceptable?
With debt at 17.45% of equity, PTRO may be thought of as appropriately levered. PTRO is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if PTRO’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 PTRO, the ratio of 450x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as PTRO’s high interest coverage is seen as responsible and safe practice.
PTRO’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for PTRO’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Pelatro to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PTRO’s future growth? Take a look at our free research report of analyst consensus for PTRO’s outlook.
- Valuation: What is PTRO 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 PTRO 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.