Investors are always looking for growth in small-cap stocks like PCAS SA (EPA:PCA), with a market cap of €195m. However, an important fact which most ignore is: how financially healthy is the business? Since PCA is loss-making right now, it’s essential to evaluate the current state of its operations and pathway to profitability. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, these checks don't give you a full picture, so I suggest you dig deeper yourself into PCA here.

Does PCA Produce Much Cash Relative To Its Debt?

PCA has sustained its debt level by about €63m over the last 12 months which accounts for long term debt. At this current level of debt, PCA's cash and short-term investments stands at €5.4m to keep the business going. Moreover, PCA has produced €30m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 48%, signalling that PCA’s operating cash is sufficient to cover its debt.

Can PCA pay its short-term liabilities?

At the current liabilities level of €93m, it appears that the company has been able to meet these obligations given the level of current assets of €140m, with a current ratio of 1.51x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Life Sciences companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Does PCA face the risk of succumbing to its debt-load?

With debt reaching 66% of equity, PCA 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. Though, since PCA is currently loss-making, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.

Next Steps:

Although PCA’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I'm sure PCA has company-specific issues impacting its capital structure decisions. You should continue to research PCAS to get a more holistic view of the small-cap by looking at:

1. Valuation: What is PCA 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 PCA is currently mispriced by the market.

2. Historical Performance: What has PCA's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.

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.

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.