Yahoo Finance What You Must Know About Polypipe Group plc’s (LON:PLP) Financial Strength
Investors are always looking for growth in small-cap stocks like Polypipe Group plc (LON:PLP), with a market cap of UK£774m. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, since I only look at basic financial figures, I recommend you dig deeper yourself into PLP here.
How does PLP’s operating cash flow stack up against its debt?
PLP has shrunken its total debt levels in the last twelve months, from UK£210m to UK£186m , which is made up of current and long term debt. With this debt repayment, PLP’s cash and short-term investments stands at UK£39m for investing into the business. On top of this, PLP has generated UK£71m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 38%, indicating that PLP’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In PLP’s case, it is able to generate 0.38x cash from its debt capital.
Can PLP meet its short-term obligations with the cash in hand?
At the current liabilities level of UK£86m liabilities, the company has been able to meet these commitments with a current assets level of UK£136m, leading to a 1.58x current account ratio. Generally, for Building companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Is PLP’s debt level acceptable?
With a debt-to-equity ratio of 59%, PLP can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some 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 after interest and tax at least three times its net interest payments is considered financially sound. In PLP’s case, the ratio of 10.74x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as PLP’s high interest coverage is seen as responsible and safe practice.
Next Steps:
PLP’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for PLP’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Polypipe Group to get a better picture of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for PLP’s future growth? Take a look at our free research report of analyst consensus for PLP’s outlook.
Valuation: What is PLP 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 PLP 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.
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.
