Mid-caps stocks, like PDC Energy Inc (NASDAQ:PDCE) with a market capitalization of US$2.2b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. Today we will look at PDCE’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into PDCE here.
View our latest analysis for PDC Energy
How much cash does PDCE generate through its operations?
PDCE’s debt levels surged from US$1.1b to US$1.2b over the last 12 months , which includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at US$1.4m , ready to deploy into the business. On top of this, PDCE has generated cash from operations of US$746m during the same period of time, leading to an operating cash to total debt ratio of 60%, indicating that PDCE’s debt is appropriately covered by operating cash. 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 PDCE’s case, it is able to generate 0.6x cash from its debt capital.
Can PDCE pay its short-term liabilities?
With current liabilities at US$675m, it seems that the business arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.38x.
Does PDCE face the risk of succumbing to its debt-load?
With debt reaching 53% of equity, PDCE may be thought of as relatively highly levered. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. However, since PDCE is currently 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.
Next Steps:
Although PDCE’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. But, its low liquidity raises concerns over whether current asset management practices are properly implemented for the mid-cap. This is only a rough assessment of financial health, and I’m sure PDCE has company-specific issues impacting its capital structure decisions. I suggest you continue to research PDC Energy to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PDCE’s future growth? Take a look at our free research report of analyst consensus for PDCE’s outlook.
- Valuation: What is PDCE 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 PDCE is currently mispriced by the market.
- 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 editorial-team@simplywallst.com.