Investors are always looking for growth in small-cap stocks like TerraCom Limited (ASX:TER), with a market cap of A$70.81M. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the oil and gas industry, even ones that are profitable, are more likely to be higher risk. So, understanding the company’s financial health becomes vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into TER here.
Does TER generate enough cash through operations?
Over the past year, TER has ramped up its debt from A$161.2M to A$186.4M , which is made up of current and long term debt. With this increase in debt, TER’s cash and short-term investments stands at A$8.6M , ready to deploy into the business. Though 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 examine some of TER’s operating efficiency ratios such as ROA here.
Does TER’s liquid assets cover its short-term commitments?
At the current liabilities level of A$68.1M liabilities, it seems that the business has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.31x, which is below the prudent industry ratio of 3x.
Is TER’s level of debt at an acceptable level?
With total debt exceeding equities, TER 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.
Next Steps:
Are you a shareholder? With a high level of debt on its balance sheet, TER could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for TER to increase its operational efficiency. In addition to this, the company may not be able to pay all of its upcoming liabilities from its current short-term assets. In the future, its financial position may be different. You should always be keeping abreast of market expectations for TER’s future growth on our free analysis platform.
Are you a potential investor? TER’s large debt ratio on top of poor cash coverage as well as low liquidity coverage of near-term expenses may scare some investors away intially. Though, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of TER’s track record. You should continue your analysis by taking a look at TER’s past performance analysis on our free platform to figure out TER’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.