You Might Like PQ Group Holdings Inc. (NYSE:PQG) But Do You Like Its Debt?
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Investors are always looking for growth in small-cap stocks like PQ Group Holdings Inc. (NYSE:PQG), with a market cap of US$2.2b. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, this is not a comprehensive overview, so I recommend you dig deeper yourself into PQG here.
Does PQG Produce Much Cash Relative To Its Debt?
PQG has sustained its debt level by about US$2.2b over the last 12 months – this includes long-term debt. At this current level of debt, the current cash and short-term investment levels stands at US$53m , ready to be used for running the business. On top of this, PQG has generated US$253m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 12%, indicating that PQG’s current level of operating cash is not high enough to cover debt.
Does PQG’s liquid assets cover its short-term commitments?
At the current liabilities level of US$263m, the company has been able to meet these obligations given the level of current assets of US$570m, with a current ratio of 2.17x. The current ratio is the number you get when you divide current assets by current liabilities. For Chemicals companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.
Can PQG service its debt comfortably?
PQG is a highly-leveraged company with debt exceeding equity by over 100%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established 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 before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In PQG's case, the ratio of 1.55x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as PQG’s low interest coverage already puts the company at higher risk of default.
Next Steps:
Although PQG’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 PQG'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 PQG has company-specific issues impacting its capital structure decisions. You should continue to research PQ Group Holdings to get a better picture of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for PQG’s future growth? Take a look at our free research report of analyst consensus for PQG’s outlook.
Valuation: What is PQG 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 PQG 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.
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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.
