Investors are always looking for growth in small-cap stocks like PRGX Global, Inc. (NASDAQ:PRGX), with a market cap of US$212m. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the IT industry, even ones that are profitable, tend to be high risk. So, understanding the company’s financial health becomes vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, this commentary is still very high-level, so I recommend you dig deeper yourself into PRGX here.
How does PRGX’s operating cash flow stack up against its debt?
PRGX’s debt levels surged from US$14m to US$18m over the last 12 months , which includes long-term debt. With this growth in debt, PRGX currently has US$10m remaining in cash and short-term investments , ready to deploy into the business. Additionally, PRGX has generated US$6.4m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 36%, signalling that PRGX’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In PRGX’s case, it is able to generate 0.36x cash from its debt capital.
Does PRGX’s liquid assets cover its short-term commitments?
With current liabilities at US$30m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.8x. Generally, for IT companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Can PRGX service its debt comfortably?
PRGX’s level of debt is appropriate relative to its total equity, at 28%. This range is considered safe as PRGX is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if PRGX’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 PRGX, the ratio of 2.28x 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.
PRGX’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure PRGX has company-specific issues impacting its capital structure decisions. You should continue to research PRGX Global to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PRGX’s future growth? Take a look at our free research report of analyst consensus for PRGX’s outlook.
- Valuation: What is PRGX 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 PRGX 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.
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