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Investors are always looking for growth in small-cap stocks like Pandora A/S (CPH:PNDORA), with a market cap of ø28b. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. However, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into PNDORA here.
PNDORA’s Debt (And Cash Flows)
PNDORA's debt levels surged from ø5.4b to ø6.7b over the last 12 months – this includes long-term debt. With this increase in debt, the current cash and short-term investment levels stands at ø1.4b , ready to be used for running the business. On top of this, PNDORA has generated cash from operations of ø6.6b during the same period of time, resulting in an operating cash to total debt ratio of 99%, signalling that PNDORA’s debt is appropriately covered by operating cash.
Can PNDORA meet its short-term obligations with the cash in hand?
At the current liabilities level of ø5.5b, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.36x. The current ratio is the number you get when you divide current assets by current liabilities. For Luxury companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is PNDORA’s debt level acceptable?
PNDORA 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. We can test if PNDORA’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 PNDORA, the ratio of 247x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving PNDORA ample headroom to grow its debt facilities.
PNDORA’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. 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 PNDORA has company-specific issues impacting its capital structure decisions. You should continue to research Pandora to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PNDORA’s future growth? Take a look at our free research report of analyst consensus for PNDORA’s outlook.
- Valuation: What is PNDORA 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 PNDORA 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.