Yahoo Finance What You Should Know About Petroshale Inc.'s (CVE:PSH) Financial Strength
While small-cap stocks, such as Petroshale Inc. (CVE:PSH) with its market cap of CA$213m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is vital, 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. However, this is not a comprehensive overview, so I suggest you dig deeper yourself into PSH here.
PSH’s Debt (And Cash Flows)
PSH has built up its total debt levels in the last twelve months, from CA$81m to CA$160m , which accounts for long term debt. With this increase in debt, the current cash and short-term investment levels stands at CA$491k to keep the business going. Additionally, PSH has produced cash from operations of CA$70m over the same time period, resulting in an operating cash to total debt ratio of 43%, meaning that PSH’s debt is appropriately covered by operating cash.
Can PSH pay its short-term liabilities?
At the current liabilities level of CA$44m, it appears that the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.62x. The current ratio is the number you get when you divide current assets by current liabilities.
Does PSH face the risk of succumbing to its debt-load?
PSH is a relatively highly levered company with a debt-to-equity of 82%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In PSH's case, the ratio of 2.57x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as PSH’s low interest coverage already puts the company at higher risk of default.
Next Steps:
Although PSH’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for PSH's financial health. Other important fundamentals need to be considered alongside. You should continue to research Petroshale to get a better picture of the stock by looking at:
Valuation: What is PSH 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 PSH is currently mispriced by the market.
Historical Performance: What has PSH'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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
