Is Pine Cliff Energy Ltd (TSE:PNE) A Financially Sound Company?

Investors are always looking for growth in small-cap stocks like Pine Cliff Energy Ltd (TSE:PNE), with a market cap of CA$97m. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Oil and Gas industry, in particular ones that run negative earnings, are inclined towards being higher risk. So, understanding the company’s financial health becomes crucial. I believe these basic checks tell most of the story you need to know. Nevertheless, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into PNE here.

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

Over the past year, PNE has maintained its debt levels at around CA$53m – this includes both the current and long-term debt. At this stable level of debt, the current cash and short-term investment levels stands at CA$111k , ready to deploy into the business. On top of this, PNE has generated CA$9m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 16%, indicating that PNE’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for unprofitable businesses as traditional metrics such as return on asset (ROA) requires positive earnings. In PNE’s case, it is able to generate 0.16x cash from its debt capital.

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

At the current liabilities level of CA$44m liabilities, it seems that the business may not have an easy time meeting these commitments with a current assets level of CA$17m, leading to a current ratio of 0.39x.

TSX:PNE Historical Debt October 15th 18
TSX:PNE Historical Debt October 15th 18

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

PNE is a relatively highly levered company with a debt-to-equity of 54%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since PNE is currently unprofitable, 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:

PNE’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Furthermore, its lack of liquidity raises questions over current asset management practices 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:

  1. 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.
  2. 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.