While small-cap stocks, such as PHI Inc (NASDAQ:PHII) with its market cap of USD $197.21M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the energy equipment and services industry, especially ones that are currently loss-making, tend to be high risk. Evaluating financial health as part of your investment thesis is crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into PHII here.
Does PHII generate an acceptable amount of cash through operations?
PHII’s debt levels surged from $554M to $631M over the last 12 months – this includes both the current and long-term debt. With this rise in debt, PHII currently has $292M 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 PHII’s operating efficiency ratios such as ROA here.
Can PHII meet its short-term obligations with the cash in hand?
At the current liabilities level of $57M liabilities, the company has been able to meet these obligations given the level of current assets of $522M, with a current ratio of 9.14x. Though, anything above 3x is considered high and could mean that PHII has too much idle capital in low-earning investments.
Can PHII service its debt comfortably?
Since total debt levels have outpaced equities, PHII is a highly leveraged 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 PHII is presently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
Are you a shareholder? At its current level of cash flow coverage, PHII has room for improvement to better cushion for events which may require debt repayment. Though, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. Given that PHII’s financial situation may change. I recommend keeping on top of market expectations for PHII’s future growth on our free analysis platform.