While small-cap stocks, such as Peninsula Energy Limited (ASX:PEN) with its market cap of AU$41m, 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, even ones that are profitable, tend to be high risk. Evaluating financial health as part of your investment thesis is crucial. 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 suggest you dig deeper yourself into PEN here.
Does PEN produce enough cash relative to debt?
Over the past year, PEN has reduced its debt from US$22m to US$16m – this includes long-term debt. With this debt repayment, PEN currently has US$12m remaining in cash and short-term investments for investing into the business. On top of this, PEN has generated US$14m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 84%, meaning that PEN’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In PEN’s case, it is able to generate 0.84x cash from its debt capital.
Does PEN’s liquid assets cover its short-term commitments?
Looking at PEN’s US$20m in current liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$21m, leading to a 1.06x current account ratio. Generally, for Oil and Gas 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 PEN’s debt level acceptable?
PEN’s level of debt is appropriate relative to its total equity, at 20%. This range is considered safe as PEN is not taking on too much debt obligation, which may be constraining for future growth.
PEN has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure PEN has company-specific issues impacting its capital structure decisions. I recommend you continue to research Peninsula Energy to get a more holistic view of the stock by looking at:
- Historical Performance: What has PEN’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.
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 firstname.lastname@example.org.