Pencil doesn't try to compete with Flash, despite that the animations are key stills and different layers. Contrary to Flash, Pencil requires you to draw by hand each of the frames that make up the animation.
There are four layers that Pencil lets you create: bitmap image, vector image, sound, and video. You'll have to place the corresponding elements in each one to obtain the animation.
The Windows version still doesn't allow you to export the animation to video, a feature that is in other operating systems like Macintosh.