While small-cap stocks, such as PNX Metals Limited (ASX:PNX) with its market cap of A$11.08M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that PNX is not presently profitable, it’s crucial to assess the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. However, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into PNX here.
Does PNX generate an acceptable amount of cash through operations?
Over the past year, PNX has maintained its debt levels at around A$1.2M – this includes both the current and long-term debt. At this constant level of debt, PNX currently has A$1.7M remaining in cash and short-term investments , ready to deploy into the business. However, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of PNX’s operating efficiency ratios such as ROA here.
Does PNX’s liquid assets cover its short-term commitments?
Looking at PNX’s most recent A$0.6M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of A$2.1M, with a current ratio of 3.22x. Though, a ratio greater than 3x may be considered as too high, as PNX could be holding too much capital in a low-return investment environment.
Is PNX’s level of debt at an acceptable level?
PNX’s level of debt is appropriate relative to its total equity, at 21.62%. This range is considered safe as PNX is not taking on too much debt obligation, which may be constraining for future growth. Investors’ risk associated with debt is very low with PNX, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Next Steps:
Are you a shareholder? PNX’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Given that PNX’s financial situation may change. You should always be keeping abreast of market expectations for PNX’s future growth on our free analysis platform.