What does Pinnacle Renewable Energy Inc.'s (TSE:PL) Balance Sheet Tell Us About Its Future?

Pinnacle Renewable Energy Inc. (TSE:PL) is a small-cap stock with a market capitalization of CA$400m. 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? Companies operating in the Oil and Gas industry, in particular ones that run negative earnings, are more likely to be higher risk. Assessing first and foremost the financial health is vital. I believe these basic checks tell most of the story you need to know. Nevertheless, this commentary is still very high-level, so I suggest you dig deeper yourself into PL here.

Does PL produce enough cash relative to debt?

PL has shrunken its total debt levels in the last twelve months, from CA$265m to CA$195m , which includes long-term debt. With this debt payback, PL's cash and short-term investments stands at CA$7.3m for investing into the business. On top of this, PL has produced cash from operations of CA$35m in the last twelve months, resulting in an operating cash to total debt ratio of 18%, indicating that PL’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency for unprofitable companies since metrics such as return on asset (ROA) requires positive earnings. In PL’s case, it is able to generate 0.18x cash from its debt capital.

Can PL meet its short-term obligations with the cash in hand?

At the current liabilities level of CA$53m, the company has been able to meet these commitments with a current assets level of CA$62m, leading to a 1.16x current account ratio. Generally, for Oil and Gas 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.

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

With debt reaching 94% of equity, PL may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since PL is currently loss-making, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.

Next Steps:

PL’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around PL'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 PL has been performing in the past. I recommend you continue to research Pinnacle Renewable Energy to get a more holistic view of the small-cap by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for PL’s future growth? Take a look at our free research report of analyst consensus for PL’s outlook.
2. Historical Performance: What has PL'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.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.