Investors are always looking for growth in small-cap stocks like Pendragon PLC (LON:PDG), with a market cap of UK£312m. However, an important fact which most ignore is: how financially healthy is the business? Specialty Retail businesses operating in the environment facing headwinds from current disruption, even ones that are profitable, tend to be high risk. Assessing first and foremost the financial health is vital. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into PDG here.
How does PDG’s operating cash flow stack up against its debt?
Over the past year, PDG has reduced its debt from UK£187m to UK£153m , which includes long-term debt. With this reduction in debt, PDG’s cash and short-term investments stands at UK£47m for investing into the business. Moreover, PDG has produced cash from operations of UK£135m in the last twelve months, leading to an operating cash to total debt ratio of 88%, signalling that PDG’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In PDG’s case, it is able to generate 0.88x cash from its debt capital.
Can PDG meet its short-term obligations with the cash in hand?
With current liabilities at UK£1.3b, it appears that the company may not have an easy time meeting these commitments with a current assets level of UK£1.2b, leading to a current ratio of 0.95x.
Can PDG service its debt comfortably?
With debt at 34% of equity, PDG may be thought of as appropriately levered. PDG is not taking on too much debt commitment, which may be constraining for future growth. We can test if PDG’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 PDG, the ratio of 3.13x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving PDG ample headroom to grow its debt facilities.
PDG has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. But, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven’t considered other factors such as how PDG has been performing in the past. I suggest you continue to research Pendragon to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PDG’s future growth? Take a look at our free research report of analyst consensus for PDG’s outlook.
- Valuation: What is PDG 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 PDG 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 past 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. For errors that warrant correction please contact the editor at firstname.lastname@example.org.