Investors are always looking for growth in small-cap stocks like Pacific Ethanol, Inc. (NASDAQ:PEIX), with a market cap of US$61m. However, an important fact which most ignore is: how financially healthy is the business? Oil and Gas companies, especially ones that are currently loss-making, are more likely to be higher risk. So, understanding the company’s financial health becomes vital. 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 PEIX here.
How much cash does PEIX generate through its operations?
PEIX has sustained its debt level by about US$235m over the last 12 months including long-term debt. At this current level of debt, PEIX currently has US$56m remaining in cash and short-term investments for investing into the business. On top of this, PEIX has generated US$28m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 12%, meaning that PEIX’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency for loss making businesses as traditional metrics such as return on asset (ROA) requires positive earnings. In PEIX’s case, it is able to generate 0.12x cash from its debt capital.
Does PEIX’s liquid assets cover its short-term commitments?
At the current liabilities level of US$99m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.94x. Generally, for Oil and Gas companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Can PEIX service its debt comfortably?
With debt reaching 67% of equity, PEIX may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since PEIX is presently loss-making, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
PEIX’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 PEIX’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 PEIX has company-specific issues impacting its capital structure decisions. You should continue to research Pacific Ethanol to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PEIX’s future growth? Take a look at our free research report of analyst consensus for PEIX’s outlook.
- Valuation: What is PEIX 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 PEIX 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 email@example.com.