Are Petrus Resources Ltd.’s (TSE:PRQ) Interest Costs Too High?


Investors are always looking for growth in small-cap stocks like Petrus Resources Ltd. (TSE:PRQ), with a market cap of CA$14m. However, an important fact which most ignore is: how financially healthy is the business? Since PRQ is loss-making right now, it’s crucial to assess the current state of its operations and pathway to profitability. The following basic checks can help you get a picture of the company’s balance sheet strength. Nevertheless, this is not a comprehensive overview, so I’d encourage you to dig deeper yourself into PRQ here.

PRQ’s Debt (And Cash Flows)

PRQ has sustained its debt level by about CA$133m over the last 12 months including long-term debt. At this stable level of debt, PRQ currently has CA$3.6m remaining in cash and short-term investments , ready to be used for running the business. Moreover, PRQ has generated CA$32m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 24%, signalling that PRQ’s current level of operating cash is high enough to cover debt.

Does PRQ’s liquid assets cover its short-term commitments?

Looking at PRQ’s CA$25m in current liabilities, it seems that the business arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.63x. The current ratio is calculated by dividing current assets by current liabilities.

TSX:PRQ Historical Debt, June 11th 2019
TSX:PRQ Historical Debt, June 11th 2019

Does PRQ face the risk of succumbing to its debt-load?

With a debt-to-equity ratio of 97%, PRQ can be considered as an above-average leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. But since PRQ is presently unprofitable, 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:

PRQ’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. However, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven’t considered other factors such as how PRQ has been performing in the past. You should continue to research Petrus Resources to get a more holistic view of the stock by looking at:

  1. Valuation: What is PRQ 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 PRQ is currently mispriced by the market.
  2. Historical Performance: What has PRQ’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.

