Yahoo Finance How Financially Strong Is Paragon Care Limited (ASX:PGC)?
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Paragon Care Limited (ASX:PGC) is a small-cap stock with a market capitalization of AU$149m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Assessing first and foremost the financial health is essential, since poor capital management may bring about 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, these checks don't give you a full picture, so I’d encourage you to dig deeper yourself into PGC here.
Does PGC Produce Much Cash Relative To Its Debt?
PGC's debt levels surged from AU$51m to AU$104m over the last 12 months – this includes long-term debt. With this growth in debt, PGC currently has AU$45m remaining in cash and short-term investments to keep the business going. On top of this, PGC has produced cash from operations of AU$11m over the same time period, resulting in an operating cash to total debt ratio of 10%, signalling that PGC’s current level of operating cash is not high enough to cover debt.
Does PGC’s liquid assets cover its short-term commitments?
Looking at PGC’s AU$75m in current liabilities, the company has been able to meet these commitments with a current assets level of AU$163m, leading to a 2.19x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. For Healthcare companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can PGC service its debt comfortably?
With debt reaching 50% of equity, PGC may be thought of as relatively highly levered. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In PGC's case, the ratio of 3.15x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving PGC ample headroom to grow its debt facilities.
Next Steps:
Although PGC’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around PGC's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for PGC's financial health. Other important fundamentals need to be considered alongside. You should continue to research Paragon Care to get a better picture of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for PGC’s future growth? Take a look at our free research report of analyst consensus for PGC’s outlook.
Valuation: What is PGC 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 PGC 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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