Is Premier African Minerals Limited's (LON:PREM) Balance Sheet A Threat To Its Future?

Investors are always looking for growth in small-cap stocks like Premier African Minerals Limited (AIM:PREM), with a market cap of £14.46M. However, an important fact which most ignore is: how financially healthy is the business? Given that PREM is not presently profitable, it’s vital to assess the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I suggest you dig deeper yourself into PREM here.

Does PREM generate an acceptable amount of cash through operations?

PREM has built up its total debt levels in the last twelve months, from $2.3M to $2.8M . With this rise in debt, the current cash and short-term investment levels stands at $0.4M , ready to deploy into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of PREM’s operating efficiency ratios such as ROA here.

Does PREM’s liquid assets cover its short-term commitments?

Looking at PREM’s most recent $6.6M liabilities, the company is not able to meet these obligations given the level of current assets of $1.0M, with a current ratio of 0.15x below the prudent level of 3x.

Can PREM service its debt comfortably?

With a debt-to-equity ratio of 2.41%, PREM's debt level is relatively low. This range is considered safe as PREM is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. Investors' risk associated with debt is virtually non-existent with PREM, and the company has plenty of headroom and ability to raise debt should it need to in the future.

Next Steps:

PREM’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. In addition to this, the company may not be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven't considered other factors such as how PREM has been performing in the past. You should continue to research Premier African Minerals to get a better picture of the stock by looking at:

• 1. Historical Performance: What has PREM'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.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.