Prosafe SE (OB:PRS) is a small-cap stock with a market capitalization of ØRE988.37M. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Energy Services companies, especially ones that are currently loss-making, are inclined towards being higher risk. So, understanding the company’s financial health becomes vital. Here are few basic financial health checks you should consider before taking the plunge. However, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into PRS here.
Does PRS generate enough cash through operations?
PRS has shrunken its total debt levels in the last twelve months, from US$1.44B to US$1.35B , which comprises of short- and long-term debt. With this debt payback, PRS currently has US$231.90M remaining in cash and short-term investments for investing into the business. Moreover, PRS has produced cash from operations of US$156.10M over the same time period, resulting in an operating cash to total debt ratio of 11.58%, signalling that PRS’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency for unprofitable businesses since metrics such as return on asset (ROA) requires a positive net income. In PRS’s case, it is able to generate 0.12x cash from its debt capital.
Does PRS’s liquid assets cover its short-term commitments?
At the current liabilities level of US$97.90M liabilities, the company has been able to meet these commitments with a current assets level of US$284.10M, leading to a 2.9x current account ratio. Generally, for Energy Services companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can PRS service its debt comfortably?
With total debt exceeding equities, PRS is considered a highly levered company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since PRS is presently loss-making, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
At its current level of cash flow coverage, PRS has room for improvement to better cushion for events which may require debt repayment. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for PRS’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Prosafe to get a better picture of the stock by looking at:
- 1. Future Outlook: What are well-informed industry analysts predicting for PRS’s future growth? Take a look at our free research report of analyst consensus for PRS’s outlook.
- 2. Valuation: What is PRS 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 PRS is currently mispriced by the market.
- 3. 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 pass 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.