Investors are always looking for growth in small-cap stocks like Pine Cliff Energy Ltd. (TSE:PNE), with a market cap of CA$80m. However, an important fact which most ignore is: how financially healthy is the business? Given that PNE is not presently profitable, it’s crucial to evaluate the current state of its operations and pathway to profitability. The following basic checks can help you get a picture of the company’s balance sheet strength. Nevertheless, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into PNE here.
Does PNE Produce Much Cash Relative To Its Debt?
PNE’s debt level has been constant at around CA$60m over the previous year including long-term debt. At this stable level of debt, PNE’s cash and short-term investments stands at CA$3.6m , ready to be used for running the business. On top of this, PNE has produced cash from operations of CA$8.6m during the same period of time, resulting in an operating cash to total debt ratio of 14%, signalling that PNE’s current level of operating cash is not high enough to cover debt.
Can PNE meet its short-term obligations with the cash in hand?
At the current liabilities level of CA$19m, it appears that the company has been able to meet these obligations given the level of current assets of CA$21m, with a current ratio of 1.09x. The current ratio is the number you get when you divide current assets by current liabilities. For Oil and Gas companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does PNE face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 99%, PNE can be considered as an above-average leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. However, since PNE is presently loss-making, sustainability of its current state of operations becomes a concern. 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:
Although PNE’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around PNE’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 PNE has been performing in the past. I recommend you continue to research Pine Cliff Energy to get a more holistic view of the small-cap by looking at:
- Valuation: What is PNE 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 PNE is currently mispriced by the market.
- 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.
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