While small-cap stocks, such as Polarcus Limited (OB:PLCS) with its market cap of ØRE599.91M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. 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 essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into PLCS here.
Does PLCS generate enough cash through operations?
PLCS has sustained its debt level by about US$302.92M over the last 12 months made up of current and long term debt. At this current level of debt, the current cash and short-term investment levels stands at US$25.85M , ready to deploy into the business. Moreover, PLCS has produced US$34.06M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 11.25%, signalling that PLCS’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency for unprofitable businesses as traditional metrics such as return on asset (ROA) requires positive earnings. In PLCS’s case, it is able to generate 0.11x cash from its debt capital.
Does PLCS’s liquid assets cover its short-term commitments?
With current liabilities at US$349.55M, the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.2x, which is below the prudent industry ratio of 3x.
Can PLCS service its debt comfortably?Since total debt levels have outpaced equities, PLCS is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since PLCS is presently loss-making, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
PLCS’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I’m sure PLCS has company-specific issues impacting its capital structure decisions. You should continue to research Polarcus to get a more holistic view of the stock by looking at:
- 1. Future Outlook: What are well-informed industry analysts predicting for PLCS’s future growth? Take a look at our free research report of analyst consensus for PLCS’s outlook.
- 2. Historical Performance: What has PLCS’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.
- 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.