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Is Pilbara Minerals Limited (ASX:PLS) A Financially Sound Company?

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Pilbara Minerals Limited (ASX:PLS) is a small-cap stock with a market capitalization of AU$1.0b. 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? Given that PLS is not presently profitable, it’s vital 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. Nevertheless, this is not a comprehensive overview, so I suggest you dig deeper yourself into PLS here.

PLS’s Debt (And Cash Flows)

PLS has built up its total debt levels in the last twelve months, from AU$123m to AU$142m , which accounts for long term debt. With this increase in debt, the current cash and short-term investment levels stands at AU$70m to keep the business going. Its negative operating cash flow means calculating cash-to-debt wouldn't be useful. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of PLS’s operating efficiency ratios such as ROA here.

Can PLS pay its short-term liabilities?

With current liabilities at AU$57m, it seems that the business has been able to meet these obligations given the level of current assets of AU$113m, with a current ratio of 1.99x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Metals and Mining companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.

ASX:PLS Historical Debt, June 26th 2019
ASX:PLS Historical Debt, June 26th 2019

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

PLS is a relatively highly levered company with a debt-to-equity of 43%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. But since PLS is presently loss-making, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.

Next Steps:

Although PLS’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around PLS'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 PLS has company-specific issues impacting its capital structure decisions. I suggest you continue to research Pilbara Minerals to get a more holistic view of the small-cap by looking at:

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  1. Future Outlook: What are well-informed industry analysts predicting for PLS’s future growth? Take a look at our free research report of analyst consensus for PLS’s outlook.

  2. Valuation: What is PLS 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 PLS 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.

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.