While small-cap stocks, such as Pingtan Marine Enterprise Ltd. (NASDAQ:PME) with its market cap of US$168m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Understanding the company’s financial health becomes crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company’s balance sheet strength. Nevertheless, this is not a comprehensive overview, so I suggest you dig deeper yourself into PME here.
Does PME Produce Much Cash Relative To Its Debt?
Over the past year, PME has maintained its debt levels at around US$36m – this includes long-term debt. At this constant level of debt, PME’s cash and short-term investments stands at US$2.0m , ready to be used for running the business. On top of this, PME has generated cash from operations of US$53m over the same time period, resulting in an operating cash to total debt ratio of 148%, signalling that PME’s operating cash is sufficient to cover its debt.
Can PME pay its short-term liabilities?
With current liabilities at US$73m, it seems that the business may not be able to easily meet these obligations given the level of current assets of US$15m, with a current ratio of 0.21x. The current ratio is the number you get when you divide current assets by current liabilities.
Can PME service its debt comfortably?
PME’s level of debt is appropriate relative to its total equity, at 24%. PME is not taking on too much debt commitment, which may be constraining for future growth. We can test if PME’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 PME, the ratio of 24.26x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving PME ample headroom to grow its debt facilities.
PME’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Though its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for PME’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Pingtan Marine Enterprise to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PME’s future growth? Take a look at our free research report of analyst consensus for PME’s outlook.
- Historical Performance: What has PME’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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.
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