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While small-cap stocks, such as Central Petroleum Limited (ASX:CTP) with its market cap of AU$109.60M, 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 Oil and Gas industry, in particular ones that run negative earnings, are more likely to be higher risk. So, understanding the company’s financial health becomes vital. I believe these basic checks tell most of the story you need to know. However, since I only look at basic financial figures, I recommend you dig deeper yourself into CTP here.
Does CTP generate enough cash through operations?
CTP has sustained its debt level by about AU$82.17M over the last 12 months made up of current and long term debt. At this current level of debt, CTP’s cash and short-term investments stands at AU$5.48M , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, 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 assess some of CTP’s operating efficiency ratios such as ROA here.
Can CTP meet its short-term obligations with the cash in hand?
With current liabilities at AU$13.01M, it seems that the business has been able to meet these obligations given the level of current assets of AU$13.75M, with a current ratio of 1.06x. For Oil and Gas companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can CTP service its debt comfortably?
With total debt exceeding equities, CTP is considered a highly levered company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since CTP is currently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
At its current level of cash flow coverage, CTP has room for improvement to better cushion for events which may require debt repayment. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure CTP has company-specific issues impacting its capital structure decisions. I suggest you continue to research Central Petroleum to get a more holistic view of the stock by looking at: