Are Projektengagemang Sweden AB (publ)'s (STO:PENG B) Interest Costs Too High?
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Projektengagemang Sweden AB (publ) (STO:PENG B) is a small-cap stock with a market capitalization of kr614m. 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? Assessing first and foremost the financial health is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, this is just a partial view of the stock, and I recommend you dig deeper yourself into PENG B here.
Does PENG B Produce Much Cash Relative To Its Debt?
Over the past year, PENG B has borrowed debt capital of around kr338m including long-term debt. With this ramp up in debt, the current cash and short-term investment levels stands at kr72m to keep the business going. Additionally, PENG B has generated cash from operations of kr12m during the same period of time, resulting in an operating cash to total debt ratio of 3.5%, signalling that PENG B’s debt is not covered by operating cash.
Can PENG B pay its short-term liabilities?
At the current liabilities level of kr355m, it appears that the company has been able to meet these obligations given the level of current assets of kr467m, with a current ratio of 1.32x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Professional Services companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can PENG B service its debt comfortably?
PENG B is a relatively highly levered company with a debt-to-equity of 57%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. 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 PENG B's case, the ratio of 8.99x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving PENG B ample headroom to grow its debt facilities.
Next Steps:
Although PENG B’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 PENG B's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how PENG B has been performing in the past. I recommend you continue to research Projektengagemang Sweden to get a more holistic view of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for PENG B’s future growth? Take a look at our free research report of analyst consensus for PENG B’s outlook.
Valuation: What is PENG B 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 PENG B 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.
