Is Petropavlovsk PLC's (LON:POG) Balance Sheet A Threat To Its Future?

Petropavlovsk PLC (LON:POG) is a small-cap stock with a market capitalization of US$227.96m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? So, understanding the company's financial health becomes crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, I know these factors are very high-level, so I suggest you dig deeper yourself into POG here.

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

POG's debt level has been constant at around US$596.47m over the previous year comprising of short- and long-term debt. At this stable level of debt, the current cash and short-term investment levels stands at US$11.42m for investing into the business. Additionally, POG has generated US$124.00m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 20.79%, signalling that POG’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In POG’s case, it is able to generate 0.21x cash from its debt capital.

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

Looking at POG’s most recent US$96.61m liabilities, the company has been able to meet these commitments with a current assets level of US$259.90m, leading to a 2.69x current account ratio. Usually, for Metals and Mining companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Is POG’s debt level acceptable?

POG is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In POG's case, the ratio of 2.93x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.

Next Steps:

POG’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven't considered other factors such as how POG has been performing in the past. I suggest you continue to research Petropavlovsk to get a better picture of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for POG’s future growth? Take a look at our free research report of analyst consensus for POG’s outlook.
2. Valuation: What is POG 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 POG is currently mispriced by the market.
3. 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.

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.