While small-cap stocks, such as Petropavlovsk PLC (LSE:POG) with its market cap of UK£247.78M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, this commentary is still very high-level, so I recommend you dig deeper yourself into POG here.
Does POG generate enough cash through operations?
Over the past year, POG has maintained its debt levels at around US$611.21M comprising of short- and long-term debt. At this stable level of debt, POG currently has US$12.64M remaining in cash and short-term investments for investing into the business. Additionally, POG has produced US$37.00M in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 6.05%, indicating that POG’s current level of operating cash is not high enough to cover 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 0.061x cash from its debt capital.
Can POG pay its short-term liabilities?
Looking at POG’s most recent US$143.23M liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$293.12M, leading to a 2.05x current account ratio. Usually, for Metals and Mining companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does POG face the risk of succumbing to its debt-load?
With total debt exceeding equities, POG is considered a highly levered company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether POG is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In POG’s, case, the ratio of 2.49x 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 cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure POG has company-specific issues impacting its capital structure decisions. I recommend you continue to research Petropavlovsk to get a better picture of the stock by looking at the areas below. Just a heads up – to access some parts of the Simply Wall St research tool you might be asked to create a free account, but it takes just one click and the information they provide is definitely worth it in my opinion.
- 1. Future Outlook: What are well-informed industry analysts predicting for POG’s future growth? Take a look at this 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 this 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 a free list of these great stocks here.