Investors are always looking for growth in small-cap stocks like Pacific Ethanol Inc (NASDAQ:PEIX), with a market cap of US$122.67m. However, an important fact which most ignore is: how financially healthy is the business? Oil and Gas companies, in particular ones that run negative earnings, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, since I only look at basic financial figures, I suggest you dig deeper yourself into PEIX here.
Does PEIX produce enough cash relative to debt?
PEIX has built up its total debt levels in the last twelve months, from US$199.87m to US$0 , which is made up of current and long term debt. With this rise in debt, PEIX currently has US$49.49m remaining in cash and short-term investments , ready to deploy into the business. Additionally, PEIX has generated US$36.51m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 15.10%, signalling that PEIX’s operating cash is not sufficient to cover its 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 PEIX’s case, it is able to generate 0.15x cash from its debt capital.
Can PEIX pay its short-term liabilities?
At the current liabilities level of US$90.71m liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$203.25m, leading to a 2.24x current account ratio. Usually, for Oil and Gas companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can PEIX service its debt comfortably?PEIX is a relatively highly levered company with a debt-to-equity of 65.56%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since PEIX is currently loss-making, there’s a question of sustainability of its current operations. 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 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 PEIX’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Pacific Ethanol to get a more holistic view 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.