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Aban Offshore Limited (NSEI:ABAN) is a small-cap stock with a market capitalization of ₹9.68B. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Energy Services companies, especially ones that are currently loss-making, tend to be high risk. So, understanding the company’s financial health becomes essential. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into ABAN here.
Does ABAN generate an acceptable amount of cash through operations?
ABAN’s debt level has been constant at around ₹140.05B over the previous year made up of current and long term debt. At this constant level of debt, ABAN’s cash and short-term investments stands at ₹943.08M for investing into the business. Additionally, ABAN has generated cash from operations of ₹18.02B during the same period of time, resulting in an operating cash to total debt ratio of 12.87%, indicating that ABAN’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for unprofitable companies as traditional metrics such as return on asset (ROA) requires positive earnings. In ABAN’s case, it is able to generate 0.13x cash from its debt capital.
Does ABAN’s liquid assets cover its short-term commitments?
Looking at ABAN’s most recent ₹38.42B liabilities, it appears that the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.63x, which is below the prudent industry ratio of 3x.
Can ABAN service its debt comfortably?
With total debt exceeding equities, ABAN is considered a highly levered 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 ABAN is presently unprofitable, sustainability of its current state of operations becomes a concern. 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:
ABAN’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. In addition to this, 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 ABAN has been performing in the past. You should continue to research Aban Offshore to get a better picture of the stock by looking at: