While small-cap stocks, such as Pacific Ethanol Inc (NASDAQ:PEIX) with its market cap of US$127.05m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Oil and Gas companies, especially ones that are currently loss-making, are inclined towards being higher risk. Assessing first and foremost the financial health is vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, this commentary is still very high-level, so I recommend you dig deeper yourself into PEIX here.
How much cash does PEIX generate through its operations?
PEIX has built up its total debt levels in the last twelve months, from US$197.53m to US$245.62m , which is made up of current and long term debt. With this growth in debt, PEIX’s cash and short-term investments stands at US$57.38m for investing into the business. On top of this, PEIX has generated cash from operations of US$33.33m during the same period of time, resulting in an operating cash to total debt ratio of 13.57%, indicating that PEIX’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for unprofitable companies as traditional metrics such as return on asset (ROA) requires a positive net income. In PEIX’s case, it is able to generate 0.14x cash from its debt capital.
Can PEIX pay its short-term liabilities?
At the current liabilities level of US$95.86m liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.24x. Usually, for Oil and Gas companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Is PEIX’s debt level acceptable?With debt reaching 65.56% of equity, PEIX may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since PEIX is currently unprofitable, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
PEIX’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 proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how PEIX has been performing in the past. I suggest you continue to research Pacific Ethanol to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PEIX’s future growth? Take a look at our free research report of analyst consensus for PEIX’s outlook.
- Valuation: What is PEIX 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 PEIX 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 firstname.lastname@example.org.