Investors are always looking for growth in small-cap stocks like Pingtan Marine Enterprise Ltd. (NASDAQ:PME), with a market cap of US$187m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis 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, this is not a comprehensive overview, so I recommend you dig deeper yourself into PME here.
Does PME Produce Much Cash Relative To Its Debt?
PME’s debt levels have fallen from US$49m to US$34m over the last 12 months , which also accounts for long term debt. With this reduction in debt, the current cash and short-term investment levels stands at US$9.5m , ready to be used for running the business. Additionally, PME has generated US$16m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 48%, signalling that PME’s debt is appropriately covered by operating cash.
Does PME’s liquid assets cover its short-term commitments?
Looking at PME’s US$65m in current liabilities, it seems that the business may not have an easy time meeting these commitments with a current assets level of US$28m, leading to a current ratio of 0.42x. The current ratio is calculated by dividing current assets by current liabilities.
Can PME service its debt comfortably?
With debt at 22% of equity, PME may be thought of as appropriately levered. This range is considered safe as PME is not taking on too much debt obligation, which may be constraining for future growth. We can test if PME’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For PME, the ratio of 17.32x suggests that interest is comfortably covered, which means that lenders may be willing to lend out more funding as PME’s high interest coverage is seen as responsible and safe practice.
PME’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Though its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I’m sure PME has company-specific issues impacting its capital structure decisions. I recommend you continue to research Pingtan Marine Enterprise to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PME’s future growth? Take a look at our free research report of analyst consensus for PME’s outlook.
- Historical Performance: What has PME’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.
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