Investors are always looking for growth in small-cap stocks like Pacific Ethanol, Inc. (NASDAQ:PEIX), with a market cap of US$64m. However, an important fact which most ignore is: how financially healthy is the business? Oil and Gas companies, especially ones that are currently loss-making, are inclined towards being 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. Nevertheless, I know these factors are very high-level, so I recommend you dig deeper yourself into PEIX here.
Does PEIX produce enough cash relative to debt?
PEIX’s debt level has been constant at around US$235m over the previous year – this includes long-term debt. At this stable level of debt, PEIX’s cash and short-term investments stands at US$56m , ready to deploy into the business. Additionally, PEIX has produced cash from operations of US$28m over the same time period, resulting in an operating cash to total debt ratio of 12%, indicating that PEIX’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for loss making businesses as traditional metrics such as return on asset (ROA) requires a positive net income. In PEIX’s case, it is able to generate 0.12x cash from its debt capital.
Does PEIX’s liquid assets cover its short-term commitments?
With current liabilities at US$99m, it seems that the business has been able to meet these commitments with a current assets level of US$192m, leading to a 1.94x current account ratio. For Oil and Gas companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can PEIX service its debt comfortably?
PEIX is a relatively highly levered company with a debt-to-equity of 67%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since PEIX is currently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Although PEIX’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for PEIX’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Pacific Ethanol to get a more holistic view of the small-cap 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 email@example.com.