Is Perpetual Energy Inc (TSE:PMT) A Financially Sound Company?

Perpetual Energy Inc (TSE:PMT) is a small-cap stock with a market capitalization of CA$28.61m. 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? Oil and Gas companies, especially ones that are currently loss-making, are more likely to be higher risk. Assessing first and foremost the financial health is crucial. Here are few basic financial health checks you should consider before taking the plunge. However, since I only look at basic financial figures, I suggest you dig deeper yourself into PMT here.

How does PMT’s operating cash flow stack up against its debt?

Over the past year, PMT has ramped up its debt from CA$108.42m to CA$127.64m , which is made up of current and long term debt. With this rise in debt, PMT currently has CA$0 remaining in cash and short-term investments for investing into the business. On top of this, PMT has produced cash from operations of CA$19.17m in the last twelve months, leading to an operating cash to total debt ratio of 15.02%, meaning that PMT’s current level of operating cash is not high enough to cover 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 PMT’s case, it is able to generate 0.15x cash from its debt capital.

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

At the current liabilities level of CA$61.43m liabilities, the company has not been able to meet these commitments with a current assets level of CA$54.58m, leading to a 0.89x current account ratio. which is under the appropriate industry ratio of 3x.

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

With a debt-to-equity ratio of 90.79%, PMT can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since PMT is currently loss-making, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.

Next Steps:

PMT’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven't considered other factors such as how PMT has been performing in the past. I recommend you continue to research Perpetual Energy to get a better picture of the stock by looking at:

1. Valuation: What is PMT 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 PMT is currently mispriced by the market.
2. Historical Performance: What has PMT'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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email 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.