Investors are always looking for growth in small-cap stocks like Paramount Resources Ltd. (TSE:POU), with a market cap of CA$954m. However, an important fact which most ignore is: how financially healthy is the business? Given that POU is not presently profitable, it’s vital to assess the current state of its operations and pathway to profitability. We’ll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, this is not a comprehensive overview, so I’d encourage you to dig deeper yourself into POU here.
Does POU Produce Much Cash Relative To Its Debt?
Over the past year, POU has ramped up its debt from CA$702m to CA$815m , which accounts for long term debt. With this growth in debt, POU’s cash and short-term investments stands at CA$19m to keep the business going. Moreover, POU has generated cash from operations of CA$223m in the last twelve months, resulting in an operating cash to total debt ratio of 27%, meaning that POU’s operating cash is sufficient to cover its debt.
Does POU’s liquid assets cover its short-term commitments?
With current liabilities at CA$263m, the company may not be able to easily meet these obligations given the level of current assets of CA$215m, with a current ratio of 0.82x. The current ratio is the number you get when you divide current assets by current liabilities.
Does POU face the risk of succumbing to its debt-load?
With debt at 36% of equity, POU may be thought of as appropriately levered. POU is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. Risk around debt is very low for POU, and the company also has the ability and headroom to increase debt if needed going forward.
POU has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven’t considered other factors such as how POU has been performing in the past. You should continue to research Paramount Resources to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for POU’s future growth? Take a look at our free research report of analyst consensus for POU’s outlook.
- Valuation: What is POU 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 POU 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.
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