Investors are always looking for growth in small-cap stocks like Prosafe SE (OB:PRS), with a market cap of ØRE988.37M. 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. I believe these basic checks tell most of the story you need to know. However, since I only look at basic financial figures, I recommend you dig deeper yourself into PRS here.
Does PRS generate an acceptable amount of cash through operations?
PRS’s debt levels have fallen from US$1.44B to US$1.35B over the last 12 months – this includes both the current and long-term debt. With this debt repayment, PRS currently has US$231.90M remaining in cash and short-term investments for investing into the business. On top of this, PRS has generated US$156.10M in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 11.58%, indicating that PRS’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires a positive net income. In PRS’s case, it is able to generate 0.12x cash from its debt capital.
Does PRS’s liquid assets cover its short-term commitments?
Looking at PRS’s most recent US$97.90M liabilities, the company has been able to meet these commitments with a current assets level of US$284.10M, leading to a 2.9x current account ratio. Generally, for Energy Services companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Does PRS face the risk of succumbing to its debt-load?PRS is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. However, since PRS is currently loss-making, 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.
PRS’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Though, 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 PRS has been performing in the past. I recommend you continue to research Prosafe to get a better picture of the stock by looking at:
- 1. Future Outlook: What are well-informed industry analysts predicting for PRS’s future growth? Take a look at our free research report of analyst consensus for PRS’s outlook.
- 2. Valuation: What is PRS 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 PRS 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.