Does Low Debt-Load Make It A Financially Strong Company?

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Premiere Eastern Energy Limited (ASXEZ), with a market capitalization of USD $11 Million, is considered a small-cap company. Although such businesses are the ones which could grow the most, they are also highly prone to a downturn in the country’s economy or even a specific region. It’s low debt-to-equity ratio of 9.2% does make it look financially sound, but we must also check how its cash flows and earnings stand against its debt.

One of the major reasons that they are highly affected by a downturn in the country’s economy or an industry in the region is the lack of geographic diversification. So, investors often choose small-cap funds. On the other hand, well-versed investors allocate a small part of their portfolio capital to individual small-caps, primarily to improve its risk-return profile. However, that doesn’t reduce the risks these companies face individually. But I believe that it can be reduced to some extent by looking at these back of the hand balance sheet calculations.

Has Premiere Eastern Energy got enough cash to weather a storm?
To test Premiere Eastern Energy’s financial condition further, I would weigh its current assets against the total debt. The level of current assets indicates PEZ’s ability to survive a downturn, which most companies face several times in their life cycle. PEZ’s current assets of $204 Million cover the company’s total debt of $17 Million, indicating that the company is in a sound position to pay-down its debt when needed or favourable.


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Premiere Eastern Energy (ASXEZ) Historical Debt Jun 22nd 17


Does PEZ earn more than its interest payments?
One of the key checks of Premiere Eastern Energy’s financial health is to compare what it earns against the amount it pays as interest. This highlights the company’s ability to service debt during a downturn.A ratio of earnings versus interest payments above 5x is an indication of strong financial position. In PEZ’s case the interest on debt is well covered by earnings (238.3x coverage).


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Premiere Eastern Energy (ASXEZ) Net Worth Jun 22nd 17
Conclusion
Premiere Eastern Energy fails to impress in terms of its operating cash flows compared to its overall-debt. However, the company does well on the earnings to interest-costs ratio. It appears PEZ needs to increase the operational efficiency to be categorized as a financially healthy company. Now when you know whether you should keep the debt in mind as a risk factor when putting together your investment thesis, I recommend you check out our latest free analysis report on Premiere Eastern Energy to see what are PEZ’s growth prospects and whether it could be considered an undervalued opportunity.