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Is Prestige Consumer Healthcare Inc.'s (NYSE:PBH) Balance Sheet A Threat To Its Future?

Simply Wall St

Investors are always looking for growth in small-cap stocks like Prestige Consumer Healthcare Inc. (NYSE:PBH), with a market cap of US$1.5b. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, this is just a partial view of the stock, and I recommend you dig deeper yourself into PBH here.

PBH’s Debt (And Cash Flows)

Over the past year, PBH has reduced its debt from US$2.1b to US$1.8b , which includes long-term debt. With this debt repayment, the current cash and short-term investment levels stands at US$25m to keep the business going. On top of this, PBH has produced cash from operations of US$193m during the same period of time, leading to an operating cash to total debt ratio of 10%, indicating that PBH’s operating cash is less than its debt.

Can PBH pay its short-term liabilities?

At the current liabilities level of US$129m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.28x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Pharmaceuticals companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

NYSE:PBH Historical Debt, April 17th 2019

Does PBH face the risk of succumbing to its debt-load?

PBH is a highly-leveraged company with debt exceeding equity by over 100%. 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 PBH 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 PBH's, case, the ratio of 2.86x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.

Next Steps:

PBH’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. Since there is also no concerns around PBH's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for PBH's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Prestige Consumer Healthcare to get a better picture of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for PBH’s future growth? Take a look at our free research report of analyst consensus for PBH’s outlook.
  2. Valuation: What is PBH 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 PBH 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.

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 editorial-team@simplywallst.com. 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.