Plaisio Computers S.A. (ATH:PLAIS) is a small-cap stock with a market capitalization of €87m. 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? Specialty Retail businesses operating in the environment facing headwinds from current disruption, even ones that are profitable, are more likely to be higher risk. So, understanding the company’s financial health becomes essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into PLAIS here.
How much cash does PLAIS generate through its operations?
Over the past year, PLAIS has reduced its debt from €17m to €16m – this includes long-term debt. With this debt repayment, PLAIS’s cash and short-term investments stands at €39m for investing into the business. On top of this, PLAIS has generated €9.0m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 56%, indicating that PLAIS’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 PLAIS’s case, it is able to generate 0.56x cash from its debt capital.
Does PLAIS’s liquid assets cover its short-term commitments?
At the current liabilities level of €43m, it seems that the business has been able to meet these obligations given the level of current assets of €114m, with a current ratio of 2.65x. For Specialty Retail 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.
Is PLAIS’s debt level acceptable?
With a debt-to-equity ratio of 18%, PLAIS’s debt level may be seen as prudent. PLAIS is not taking on too much debt commitment, which may be constraining for future growth. We can test if PLAIS’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 PLAIS, the ratio of 8.01x 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:
PLAIS has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how PLAIS has been performing in the past. You should continue to research Plaisio Computers to get a more holistic view of the stock by looking at: