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Are Portmeirion Group PLC’s (LON:PMP) Interest Costs Too High?

Julian Fleming

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Investors are always looking for growth in small-cap stocks like Portmeirion Group PLC (LON:PMP), with a market cap of UK£111m. However, an important fact which most ignore is: how financially healthy is the business? Consumer Durables businesses operating in the environment facing headwinds from current disruption, even ones that are profitable, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is crucial. I believe these basic checks tell most of the story you need to know. Though, I know these factors are very high-level, so I suggest you dig deeper yourself into PMP here.

How does PMP’s operating cash flow stack up against its debt?

PMP has shrunken its total debt levels in the last twelve months, from UK£7.9m to UK£5.9m – this includes long-term debt. With this debt payback, PMP currently has UK£4.7m remaining in cash and short-term investments , ready to deploy into the business. Additionally, PMP has generated UK£5.3m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 89%, signalling that PMP’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 PMP’s case, it is able to generate 0.89x cash from its debt capital.

Does PMP’s liquid assets cover its short-term commitments?

With current liabilities at UK£12m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.87x. For Consumer Durables companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.

AIM:PMP Historical Debt February 11th 19

Can PMP service its debt comfortably?

With debt at 14% of equity, PMP may be thought of as appropriately levered. PMP is not taking on too much debt commitment, which may be constraining for future growth. We can test if PMP’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 PMP, the ratio of 34.02x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving PMP ample headroom to grow its debt facilities.

Next Steps:

PMP has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for PMP’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Portmeirion Group to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for PMP’s future growth? Take a look at our free research report of analyst consensus for PMP’s outlook.
  2. Valuation: What is PMP 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 PMP is currently mispriced by the market.
  3. 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 editorial-team@simplywallst.com.