Is Perseus SA (ATH:PERS) A Financially Sound Company?
Investors are always looking for growth in small-cap stocks like Perseus SA (ATH:PERS), with a market cap of €16m. 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, as mismanagement of capital can lead to 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. Nevertheless, potential investors would need to take a closer look, and I suggest you dig deeper yourself into PERS here.
Does PERS Produce Much Cash Relative To Its Debt?
PERS has shrunk its total debt levels in the last twelve months, from €23m to €20m , which includes long-term debt. With this debt payback, PERS's cash and short-term investments stands at €9.3m , ready to be used for running the business. Additionally, PERS has produced €9.4m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 46%, meaning that PERS’s operating cash is sufficient to cover its debt.
Can PERS pay its short-term liabilities?
At the current liabilities level of €23m, it seems that the business has been able to meet these commitments with a current assets level of €56m, leading to a 2.41x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Food companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Is PERS’s debt level acceptable?
PERS is a relatively highly levered company with a debt-to-equity of 83%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether PERS 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 PERS's, case, the ratio of 9.93x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as PERS’s high interest coverage is seen as responsible and safe practice.
Next Steps:
PERS’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. I admit this is a fairly basic analysis for PERS's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Perseus to get a more holistic view of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for PERS’s future growth? Take a look at our free research report of analyst consensus for PERS’s outlook.
Valuation: What is PERS 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 PERS 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.
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