While small-cap stocks, such as Perma-Fix Environmental Services Inc (NASDAQ:PESI) with its market cap of US$36m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, this commentary is still very high-level, so I recommend you dig deeper yourself into PESI here.
Does PESI produce enough cash relative to debt?
PESI’s debt levels surged from US$4.1m to US$4.4m over the last 12 months , which accounts for long term debt. With this growth in debt, PESI currently has US$793k remaining in cash and short-term investments , ready to deploy into the business. On top of this, PESI has generated US$1.1m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 26%, signalling that PESI’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In PESI’s case, it is able to generate 0.26x cash from its debt capital.
Can PESI meet its short-term obligations with the cash in hand?
With current liabilities at US$20m, it seems that the business may not have an easy time meeting these commitments with a current assets level of US$16m, leading to a current ratio of 0.81x.
Does PESI face the risk of succumbing to its debt-load?
With debt at 15% of equity, PESI may be thought of as appropriately levered. PESI is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether PESI is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In PESI’s, case, the ratio of 11.29x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as PESI’s high interest coverage is seen as responsible and safe practice.
PESI’s high cash coverage and conservative debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. But, as shareholders, you should try and determine whether this level of debt is justified for PESI, especially when liquidity may also be an issue. I admit this is a fairly basic analysis for PESI’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Perma-Fix Environmental Services to get a better picture of the stock by looking at:
- Valuation: What is PESI 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 PESI is currently mispriced by the market.
- Historical Performance: What has PESI’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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 email@example.com.