While small-cap stocks, such as Pine Cliff Energy Ltd. (TSE:PNE) with its market cap of CA$78m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since PNE is loss-making right now, it’s crucial to assess the current state of its operations and pathway to profitability. 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’d encourage you to dig deeper yourself into PNE here.
Does PNE Produce Much Cash Relative To Its Debt?
PNE has built up its total debt levels in the last twelve months, from CA$51m to CA$60m – this includes long-term debt. With this increase in debt, PNE currently has CA$4.6m remaining in cash and short-term investments to keep the business going. Additionally, PNE has produced CA$2.9m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 4.7%, signalling that PNE’s debt is not covered by operating cash.
Can PNE meet its short-term obligations with the cash in hand?
At the current liabilities level of CA$19m, the company has been able to meet these commitments with a current assets level of CA$22m, leading to a 1.14x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Oil and Gas companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Does PNE face the risk of succumbing to its debt-load?
PNE is a relatively highly levered company with a debt-to-equity of 68%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. But since PNE is presently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
PNE’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure PNE has company-specific issues impacting its capital structure decisions. You should continue to research Pine Cliff Energy to get a better picture of the small-cap by looking at:
- Historical Performance: What has PNE’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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