3P Learning Limited (ASX:3PL) is a small-cap company – a market capitalization of less than $2 billion. Such companies have the highest growth potential, primarily due to their small-size. But that also makes them less diversified and susceptible to a downturn in the broader economy or the specific industry in the region. While 3PL sports a low-debt on its balance sheet with the debt-to-equity ratio of 26.5%, more metrics should be looked at before you can decide whether it’s financially strong.
One of the major reasons that they are highly affected by a downturn in the country’s economy or an industry in the region is the lack of geographic diversification. So, investors often choose small-cap funds. While savvy investors aren’t wrong in looking for singular blockbuster opportunities and trying to achieve diversification on their own by allocating a small part of their portfolio capital to small-caps, that doesn’t make these investments less risky individually. However, to help you reduce that risk, I’m going to provide you with few basic aspects other than debt-to-equity ratio to gauge a ballpark estimate on how financially strong is the company. View our latest analysis for 3P Learning
How 3P Learning’s liquid assets stack up against its debt?
To test 3P Learning’s financial condition further, I would weigh its current assets against the total debt. The level of current assets indicates 3PL’s ability to survive a downturn, which most companies face several times in their life cycle.
Can 3PL easily service its debt with what it earns?
A different way of looking at financial health is to compare 3PL’s earnings and interest-obligations. While both these numbers are taken from the income statement, they are important in understanding a company’s financial condition. An earnings to interest expense ratio of over five is a sign of good financial health as a company can easily cover those costs even if its earnings contract. In the case of 3PL, the interest on debt is well covered by earnings (6.2x coverage).
3P Learning doesn’t just sport a low-debt profile, its earnings and operating cash flows make it strong enough to get through difficult times or capitalize on attractive growth opportunities during good times. Now when you know whether you should keep the debt in mind as a risk factor when putting together your investment thesis, I recommend you check out our latest free analysis report on 3P Learning to see what are 3PL’s growth prospects and whether it could be considered an undervalued opportunity.
PS. If you are not interested in 3P Learning anymore, you can use our free platform to see my list of over 150 other stocks with a high growth potential.
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