Investors are always looking for growth in small-cap stocks like Pine Cliff Energy Ltd (TSE:PNE), with a market cap of CA$101.34m. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Oil and Gas industry, especially ones that are currently loss-making, are more likely to be higher risk. So, understanding the company’s financial health becomes essential. I believe these basic checks tell most of the story you need to know. Nevertheless, I know these factors are very high-level, so I suggest you dig deeper yourself into PNE here.
How much cash does PNE generate through its operations?
Over the past year, PNE has reduced its debt from CA$70.94m to CA$58.31m , which is made up of current and long term debt. With this debt repayment, PNE’s cash and short-term investments stands at CA$3.62m , ready to deploy into the business. Additionally, PNE has produced cash from operations of CA$25.01m over the same time period, resulting in an operating cash to total debt ratio of 42.89%, indicating that PNE’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires positive earnings. In PNE’s case, it is able to generate 0.43x cash from its debt capital.
Does PNE’s liquid assets cover its short-term commitments?
With current liabilities at CA$47.60m, it appears that the company is not able to meet these obligations given the level of current assets of CA$22.65m, with a current ratio of 0.48x below the prudent level 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 unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since PNE 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.
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. But, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I’m sure PNE has company-specific issues impacting its capital structure decisions. You should continue to research Pine Cliff Energy to get a better picture 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.