Yahoo Finance What does Pacific Energy Limited’s (ASX:PEA) Balance Sheet Tell Us About Its Future?
Investors are always looking for growth in small-cap stocks like Pacific Energy Limited (ASX:PEA), with a market cap of AU$232m. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, I know these factors are very high-level, so I recommend you dig deeper yourself into PEA here.
How does PEA’s operating cash flow stack up against its debt?
PEA has built up its total debt levels in the last twelve months, from AU$33m to AU$107m , which comprises of short- and long-term debt. With this rise in debt, PEA’s cash and short-term investments stands at AU$12m for investing into the business. Moreover, PEA has produced cash from operations of AU$36m over the same time period, resulting in an operating cash to total debt ratio of 33%, signalling that PEA’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In PEA’s case, it is able to generate 0.33x cash from its debt capital.
Can PEA pay its short-term liabilities?
At the current liabilities level of AU$34m liabilities, the company has been able to meet these obligations given the level of current assets of AU$37m, with a current ratio of 1.08x. Generally, for Renewable Energy companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is PEA’s debt level acceptable?
PEA is a relatively highly levered company with a debt-to-equity of 63%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. 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 after interest and tax at least three times its net interest payments is considered financially sound. In PEA’s case, the ratio of 10.55x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving PEA ample headroom to grow its debt facilities.
Next Steps:
PEA’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. Since there is also no concerns around PEA’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure PEA has company-specific issues impacting its capital structure decisions. I recommend you continue to research Pacific Energy to get a more holistic view of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for PEA’s future growth? Take a look at our free research report of analyst consensus for PEA’s outlook.
Valuation: What is PEA 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 PEA is currently mispriced by the market.
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.
