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Premier Foods plc (LON:PFD) is a small-cap stock with a market capitalization of UK£296m. 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? Given that PFD is not presently profitable, it’s crucial to evaluate the current state of its operations and pathway to profitability. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, this is just a partial view of the stock, and I’d encourage you to dig deeper yourself into PFD here.
Does PFD Produce Much Cash Relative To Its Debt?
PFD has sustained its debt level by about UK£498m over the last 12 months – this includes long-term debt. At this stable level of debt, PFD's cash and short-term investments stands at UK£28m , ready to be used for running the business. Moreover, PFD has generated UK£58m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 12%, signalling that PFD’s operating cash is less than its debt.
Does PFD’s liquid assets cover its short-term commitments?
At the current liabilities level of UK£249m, it appears that the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.78x. The current ratio is the number you get when you divide current assets by current liabilities.
Is PFD’s debt level acceptable?
With debt reaching 52% of equity, PFD 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. However, since PFD is presently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Although PFD’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. However, 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 PFD has company-specific issues impacting its capital structure decisions. I recommend you continue to research Premier Foods to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PFD’s future growth? Take a look at our free research report of analyst consensus for PFD’s outlook.
- Valuation: What is PFD 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 PFD 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 firstname.lastname@example.org. 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.