While small-cap stocks, such as Saffron Energy Plc (AIM:SRON) with its market cap of £8.13M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Oil and Gas companies, in particular ones that run negative earnings, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into SRON here.
How does SRON’s operating cash flow stack up against its debt?
Over the past year, SRON has reduced its debt from €11.6M to €1.8M , which is made up of current and long term debt. With this debt repayment, SRON currently has €0.1M remaining in cash and short-term investments for investing into the business. However, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, 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 take a look at some of SRON’s operating efficiency ratios such as ROA here.
Can SRON pay its short-term liabilities?
With current liabilities at €2.0M liabilities, it seems that the business is not able to meet these obligations given the level of current assets of €0.3M, with a current ratio of 0.17x below the prudent level of 3x.
Can SRON service its debt comfortably?
With a debt-to-equity ratio of 7.58%, SRON’s debt level is relatively low. This range is considered safe as SRON is not taking on too much debt obligation, which may be constraining for future growth. Investors’ risk associated with debt is virtually non-existent with SRON, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Next Steps:
Are you a shareholder? SRON’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. In addition to this, the company may not be able to pay all of its upcoming liabilities from its current short-term assets. Given that SRON’s financial situation may change. You should always be keeping on top of market expectations for SRON’s future growth on our free analysis platform.
Are you a potential investor? SRON appears to have maintained a sensible level of debt, which means there’s still some headroom to grow debt funding. But its current cash flow coverage of existing debt, in addition to the low liquidity, is concerning. However, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of SRON’s track record. I encourage you to continue your research by taking a look at SRON’s past performance analysis on our free platform to conclude on SRON’s financial health.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.