Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as Parsley Energy Inc (NYSE:PE) with a market-capitalization of US$9.4b, rarely draw their attention. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. Let’s take a look at PE’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into PE here.
How much cash does PE generate through its operations?
PE has built up its total debt levels in the last twelve months, from US$1.5b to US$2.2b , which comprises of short- and long-term debt. With this increase in debt, PE’s cash and short-term investments stands at US$301m for investing into the business. Moreover, PE has generated US$858m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 39%, signalling that PE’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In PE’s case, it is able to generate 0.39x cash from its debt capital.
Can PE pay its short-term liabilities?
At the current liabilities level of US$640m liabilities, the company may not have an easy time meeting these commitments with a current assets level of US$595m, leading to a current ratio of 0.93x.
Does PE face the risk of succumbing to its debt-load?
With debt at 36% of equity, PE may be thought of as appropriately levered. PE is not taking on too much debt commitment, which may be constraining for future growth. We can test if PE’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For PE, the ratio of 3.3x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
PE has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. However, its lack of liquidity raises questions over current asset management practices for the mid-cap. Keep in mind I haven’t considered other factors such as how PE has been performing in the past. I recommend you continue to research Parsley Energy to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PE’s future growth? Take a look at our free research report of analyst consensus for PE’s outlook.
- Valuation: What is PE 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 PE 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.