Investors are always looking for growth in small-cap stocks like Paramount Resources Ltd (TSE:POU), with a market cap of CA$1.0b. However, an important fact which most ignore is: how financially healthy is the business? Oil and Gas companies, in particular ones that run negative earnings, are inclined towards being higher risk. Assessing first and foremost the financial health is crucial. I believe these basic checks tell most of the story you need to know. However, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into POU here.
How does POU’s operating cash flow stack up against its debt?
Over the past year, POU has ramped up its debt from CA$523m to CA$695m – this includes long-term debt. With this rise in debt, POU currently has CA$36m remaining in cash and short-term investments , ready to deploy into the business. Moreover, POU has generated cash from operations of CA$254m over the same time period, leading to an operating cash to total debt ratio of 37%, signalling that POU’s operating cash is 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 POU’s case, it is able to generate 0.37x cash from its debt capital.
Does POU’s liquid assets cover its short-term commitments?
At the current liabilities level of CA$384m, it seems that the business arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.4x.
Can POU service its debt comfortably?
POU’s level of debt is appropriate relative to its total equity, at 32%. This range is considered safe as POU is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. Investors’ risk associated with debt is very low with POU, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Next Steps:
POU’s debt level is appropriate for a company its size. Furthermore, it is able to generate sufficient cash flow coverage, meaning it is able to put its debt in good use. Though its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for POU’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Paramount Resources to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for POU’s future growth? Take a look at our free research report of analyst consensus for POU’s outlook.
- Historical Performance: What has POU’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.
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.