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Investors are always looking for growth in small-cap stocks like P.A.M. Transportation Services, Inc. (NASDAQ:PTSI), with a market cap of US$292m. 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, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into PTSI here.
PTSI’s Debt (And Cash Flows)
PTSI's debt levels surged from US$176m to US$217m over the last 12 months , which accounts for long term debt. With this growth in debt, the current cash and short-term investment levels stands at US$31m to keep the business going. On top of this, PTSI has generated US$86m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 40%, indicating that PTSI’s debt is appropriately covered by operating cash.
Can PTSI pay its short-term liabilities?
With current liabilities at US$107m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.08x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Transportation companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Does PTSI face the risk of succumbing to its debt-load?
PTSI is a highly-leveraged company with debt exceeding equity by over 100%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. 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 before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In PTSI's case, the ratio of 7.7x 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.
Although PTSI’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 PTSI has company-specific issues impacting its capital structure decisions. You should continue to research P.A.M. Transportation Services to get a more holistic view of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for PTSI’s future growth? Take a look at our free research report of analyst consensus for PTSI’s outlook.
Valuation: What is PTSI 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 PTSI 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.
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 firstname.lastname@example.org. 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.