What You Must Know About Pingtan Marine Enterprise Ltd's (NASDAQ:PME) Financial Strength

Pingtan Marine Enterprise Ltd (NASDAQ:PME) is a small-cap stock with a market capitalization of US$207.91m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Assessing first and foremost the financial health is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. 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 recommend you dig deeper yourself into PME here.

Does PME produce enough cash relative to debt?

PME's debt levels have fallen from US$56.02m to US$25.99m over the last 12 months , which is made up of current and long term debt. With this reduction in debt, PME's cash and short-term investments stands at US$1.47m , ready to deploy into the business. Additionally, PME has produced cash from operations of US$25.84m during the same period of time, resulting in an operating cash to total debt ratio of 99.43%, indicating that PME’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In PME’s case, it is able to generate 0.99x cash from its debt capital.

Does PME’s liquid assets cover its short-term commitments?

With current liabilities at US$44.49m, it appears that the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.43x, which is below the prudent industry ratio of 3x.

Does PME face the risk of succumbing to its debt-load?

With a debt-to-equity ratio of 17.54%, PME's debt level may be seen as prudent. This range is considered safe as PME is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. 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 15.4x suggests that interest is comfortably 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.

Next Steps:

PME’s high cash coverage and conservative debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. But it is still important for shareholders to understand why the company isn't increasing its cheaper cost of capital to fund future growth, especially when liquidity may also be an issue. I admit this is a fairly basic analysis for PME's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Pingtan Marine Enterprise to get a better picture of the stock by looking at:

1. 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.
2. Valuation: What is PME 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 PME is currently mispriced by the market.
3. 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 editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.