Pine Cliff Energy Ltd (TSX:PNE) is a small-cap stock with a market capitalization of CA$104.41M. 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, in particular ones that run negative earnings, are inclined towards being higher risk. So, understanding the company’s financial health becomes essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into PNE here.
Does PNE generate enough cash through operations?
PNE’s debt levels have fallen from CA$70.94M to CA$58.31M over the last 12 months , which comprises of short- and long-term debt. With this reduction in debt, PNE currently has CA$3.62M remaining in cash and short-term investments , ready to deploy into the business. Additionally, PNE has produced CA$25.01M in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 42.89%, signalling that PNE’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for unprofitable companies as traditional metrics such as return on asset (ROA) requires a positive net income. In PNE’s case, it is able to generate 0.43x cash from its debt capital.
Can PNE pay its short-term liabilities?
At the current liabilities level of CA$47.60M liabilities, it appears that the company has not been able to meet these commitments with a current assets level of CA$22.65M, leading to a 0.48x current account ratio. which is under the appropriate industry ratio of 3x.
Does PNE face the risk of succumbing to its debt-load?PNE is a relatively highly levered company with a debt-to-equity of 46.06%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since PNE is currently unprofitable, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
PNE’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. However, 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 PNE has been performing in the past. I recommend you continue to research Pine Cliff Energy to get a more holistic view of the stock by looking at:
- Historical Performance: What has PNE’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.
- 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.