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What You Must Know About Primary Health Care Limited’s (ASX:PRY) Financial Strength

While small-cap stocks, such as Primary Health Care Limited (ASX:PRY) with its market cap of AU$1.96b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Healthcare companies, even ones that are profitable, are inclined towards being higher 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. Though, since I only look at basic financial figures, I suggest you dig deeper yourself into PRY here.

How much cash does PRY generate through its operations?

PRY has sustained its debt level by about AU$861.3m over the last 12 months made up of current and long term debt. At this current level of debt, the current cash and short-term investment levels stands at AU$84.0m for investing into the business. Moreover, PRY has generated AU$202.2m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 23.5%, signalling that PRY’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 PRY’s case, it is able to generate 0.23x cash from its debt capital.

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

Looking at PRY’s most recent AU$368.0m liabilities, it seems that the business has not been able to meet these commitments with a current assets level of AU$252.7m, leading to a 0.69x current account ratio. which is under the appropriate industry ratio of 3x.

ASX:PRY Historical Debt September 19th 18
ASX:PRY Historical Debt September 19th 18

Is PRY’s debt level acceptable?

With debt reaching 47.2% of equity, PRY may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if PRY’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 PRY, the ratio of 3.45x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

At its current level of cash flow coverage, PRY has room for improvement to better cushion for events which may require debt repayment. Furthermore, its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I’m sure PRY has company-specific issues impacting its capital structure decisions. You should continue to research Primary Health Care to get a better picture of the stock by looking at:

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

  2. Valuation: What is PRY 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 PRY 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.