PHX Energy Services Corp (TSE:PHX) is a small-cap stock with a market capitalization of CA$126.45m. 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? Energy Services companies, especially ones that are currently loss-making, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is vital. Here are few basic financial health checks you should consider before taking the plunge. However, this commentary is still very high-level, so I suggest you dig deeper yourself into PHX here.
Does PHX produce enough cash relative to debt?
Over the past year, PHX has reduced its debt from CA$35.05m to CA$19.62m , which is made up of current and long term debt. With this debt payback, the current cash and short-term investment levels stands at CA$4.12m , ready to deploy into the business. On top of this, PHX has generated CA$224.90k in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 1.15%, signalling that PHX’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for unprofitable businesses since metrics such as return on asset (ROA) requires a positive net income. In PHX’s case, it is able to generate 0.011x cash from its debt capital.
Can PHX meet its short-term obligations with the cash in hand?
Looking at PHX’s most recent CA$47.25m liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.05x. For Energy Services companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does PHX face the risk of succumbing to its debt-load?With a debt-to-equity ratio of 12.05%, PHX’s debt level may be seen as prudent. PHX is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. Risk around debt is very low for PHX, and the company also has the ability and headroom to increase debt if needed going forward.
PHX’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for PHX’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research PHX Energy Services to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PHX’s future growth? Take a look at our free research report of analyst consensus for PHX’s outlook.
- Valuation: What is PHX 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 PHX 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.