Investors are always looking for growth in small-cap stocks like Petrolia SE (OB:PSE), with a market cap of øre213m. However, an important fact which most ignore is: how financially healthy is the business? Energy Services companies, especially ones that are currently loss-making, are more likely to be higher risk. Assessing first and foremost the financial health is vital. Here are few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into PSE here.
Does PSE produce enough cash relative to debt?
PSE’s debt levels have fallen from US$8.4m to US$7.3m over the last 12 months , which also accounts for long term debt. With this reduction in debt, the current cash and short-term investment levels stands at US$11m for investing into the business. Additionally, PSE has generated US$6.3m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 86%, signalling that PSE’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 as traditional metrics such as return on asset (ROA) requires positive earnings. In PSE’s case, it is able to generate 0.86x cash from its debt capital.
Does PSE’s liquid assets cover its short-term commitments?
At the current liabilities level of US$22m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.54x. Generally, for Energy Services companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is PSE’s debt level acceptable?
With debt at 20% of equity, PSE may be thought of as appropriately levered. This range is considered safe as PSE is not taking on too much debt obligation, which may be constraining for future growth. Risk around debt is very low for PSE, and the company also has the ability and headroom to increase debt if needed going forward.
PSE’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for PSE’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Petrolia to get a better picture of the stock by looking at:
- Valuation: What is PSE 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 PSE is currently mispriced by the market.
- Historical Performance: What has PSE’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.
- 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 firstname.lastname@example.org.