While small-cap stocks, such as Interra Resources Limited (SGX:5GI) with its market cap of SGD31.91M, 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, especially ones that are currently loss-making, are more likely to be higher risk. So, understanding the company’s financial health becomes essential. Here are few basic financial health checks you should consider before taking the plunge. Though, this commentary is still very high-level, so I suggest you dig deeper yourself into 5GI here.
Does 5GI generate enough cash through operations?
5GI’s debt level has been constant at around $3.7M over the previous year made up of predominantly near term debt. At this constant level of debt, 5GI’s cash and short-term investments stands at $12.1M , ready to deploy into the business. However, 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. For this article’s sake, I won’t be looking at this today, but you can take a look at some of 5GI’s operating efficiency ratios such as ROA here.
Can 5GI meet its short-term obligations with the cash in hand?
With current liabilities at $25.1M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of $37.3M, with a current ratio of 1.48x. Generally, for oil and gas companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can 5GI service its debt comfortably?
5GI’s level of debt is appropriate relative to its total equity, at 14.07%. 5GI is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. 5GI’s risk around capital structure is low, and the company has the headroom and ability to raise debt should it need to in the future.
Next Steps:
Are you a shareholder? 5GI’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Going forward, its financial position may be different. I suggest keeping abreast of market expectations for 5GI’s future growth on our free analysis platform.
Are you a potential investor? 5GI’s relatively safe debt levels is even more impressive due to its ability to generate high cash flow, which illustrates operating efficiency. In addition, its high liquidity means the company should continue to operate smoothly in the case of adverse events. To gain more conviction in the stock, you need to also examine the company’s track record. I encourage you to continue your research by taking a look at 5GI’s past performance analysis on our free platform to figure out 5GI’s financial health position.
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.