Is Pine Cliff Energy Ltd’s (TSE:PNE) Balance Sheet Strong Enough To Weather A Storm?

While small-cap stocks, such as Pine Cliff Energy Ltd (TSX:PNE) with its market cap of CA$102.87M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Oil and Gas companies, in particular ones that run negative earnings, are more likely to be higher risk. Assessing first and foremost the financial health is crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, I know these factors are very high-level, so I recommend you dig deeper yourself into PNE here.

Does PNE generate an acceptable amount of cash through operations?

PNE has shrunken its total debt levels in the last twelve months, from CA$70.94M to CA$58.31M , which is made up of current and long term debt. With this debt payback, PNE currently has CA$3.62M remaining in cash and short-term investments , ready to deploy into the business. Moreover, PNE has produced cash from operations of CA$25.01M in the last twelve months, resulting in an operating cash to total debt ratio of 42.89%, meaning that PNE’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for unprofitable companies since metrics such as return on asset (ROA) requires positive earnings. In PNE’s case, it is able to generate 0.43x cash from its debt capital.

Can PNE pay its short-term liabilities?

With current liabilities at CA$47.60M, it seems that the business has not been able to meet these commitments with a current assets level of CA$22.65M, leading to a 0.48x current account ratio. which is under the appropriate industry ratio of 3x.

TSX:PNE Historical Debt Jun 7th 18

Is PNE’s debt level acceptable?

With debt reaching 46.06% of equity, PNE may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since PNE is presently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.

Next Steps:

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. However, 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 PNE’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Pine Cliff Energy to get a better picture of the stock by looking at:

1. 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.

2. 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 pass 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.