While small-cap stocks, such as PDC Energy, Inc. (NASDAQ:PDCE) with its market cap of US$2.9b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into PDCE here.
PDCE’s Debt (And Cash Flows)
PDCE's debt level has been constant at around US$1.2b over the previous year including long-term debt. At this current level of debt, PDCE's cash and short-term investments stands at US$1.4m , ready to be used for running the business. On top of this, PDCE has produced US$889m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 74%, indicating that PDCE’s debt is appropriately covered by operating cash.
Can PDCE meet its short-term obligations with the cash in hand?
Looking at PDCE’s US$441m in current liabilities, the company may not be able to easily meet these obligations given the level of current assets of US$274m, with a current ratio of 0.62x. The current ratio is calculated by dividing current assets by current liabilities.
Is PDCE’s debt level acceptable?
PDCE is a relatively highly levered company with a debt-to-equity of 47%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether PDCE is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In PDCE's, case, the ratio of 1.11x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
PDCE’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. But, its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for PDCE's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research PDC Energy to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PDCE’s future growth? Take a look at our free research report of analyst consensus for PDCE’s outlook.
- Valuation: What is PDCE 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 PDCE 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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