Yahoo Finance How Financially Strong Is Premium Brands Holdings Corporation (TSE:PBH)?
While small-cap stocks, such as Premium Brands Holdings Corporation (TSE:PBH) with its market cap of CA$2.6b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is essential, as mismanagement of capital can lead to 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. However, this is not a comprehensive overview, so I recommend you dig deeper yourself into PBH here.
Does PBH Produce Much Cash Relative To Its Debt?
Over the past year, PBH has ramped up its debt from CA$640m to CA$1.1b , which accounts for long term debt. With this growth in debt, the current cash and short-term investment levels stands at CA$19m , ready to be used for running the business. Additionally, PBH has produced CA$136m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 12%, indicating that PBH’s operating cash is less than its debt.
Can PBH pay its short-term liabilities?
With current liabilities at CA$407m, it appears that the company has been able to meet these obligations given the level of current assets of CA$696m, with a current ratio of 1.71x. The current ratio is calculated by dividing current assets by current liabilities. For Food companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
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 a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. 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 3.89x 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:
Although PBH’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 PBH's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure PBH has company-specific issues impacting its capital structure decisions. I suggest you continue to research Premium Brands Holdings to get a more holistic view of the small-cap by looking at:
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.
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.
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.
