Investors are always looking for growth in small-cap stocks like Petroleum Geo-Services ASA (OB:PGS), with a market cap of ØRE8.22B. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Energy Services industry, especially ones that are currently loss-making, are more likely to be higher risk. So, understanding the company’s financial health becomes vital. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, since I only look at basic financial figures, I recommend you dig deeper yourself into PGS here.
Does PGS generate an acceptable amount of cash through operations?
PGS has sustained its debt level by about US$1.21B over the last 12 months – this includes both the current and long-term debt. At this current level of debt, PGS’s cash and short-term investments stands at US$47.30M , ready to deploy into the business. On top of this, PGS has produced US$281.80M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 23.22%, indicating that PGS’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for loss making companies since metrics such as return on asset (ROA) requires positive earnings. In PGS’s case, it is able to generate 0.23x cash from its debt capital.
Does PGS’s liquid assets cover its short-term commitments?
Looking at PGS’s most recent US$367.20M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$447.70M, with a current ratio of 1.22x. For Energy Services companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Can PGS service its debt comfortably?Since total debt levels have outpaced equities, PGS is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since PGS is presently unprofitable, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
PGS’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 PGS has been performing in the past. I suggest you continue to research Petroleum Geo-Services to get a more holistic view of the stock by looking at:
- 1. Future Outlook: What are well-informed industry analysts predicting for PGS’s future growth? Take a look at our free research report of analyst consensus for PGS’s outlook.
- 2. Valuation: What is PGS 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 PGS 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.