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Investors are always looking for growth in small-cap stocks like Lakes Oil NL (ASX:LKO), with a market cap of AU$69.06M. However, an important fact which most ignore is: how financially healthy is the business? Oil and Gas companies, in particular ones that run negative earnings, tend to be high risk. So, understanding the company’s financial health becomes essential. I believe these basic checks tell most of the story you need to know. Though, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into LKO here.
How does LKO’s operating cash flow stack up against its debt?
LKO has shrunken its total debt levels in the last twelve months, from AU$1.22M to AU$1.13M – this includes both the current and long-term debt. With this reduction in debt, LKO’s cash and short-term investments stands at AU$593.18K for investing 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 examine some of LKO’s operating efficiency ratios such as ROA here.
Does LKO’s liquid assets cover its short-term commitments?
At the current liabilities level of AU$2.43M liabilities, the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.54x, which is below the prudent industry ratio of 3x.
Can LKO service its debt comfortably?
With a debt-to-equity ratio of 7.57%, LKO’s debt level is relatively low. This range is considered safe as LKO is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. Investors’ risk associated with debt is virtually non-existent with LKO, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Next Steps:
LKO’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Furthermore, 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 LKO has been performing in the past. You should continue to research Lakes Oil to get a more holistic view of the stock by looking at:
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Historical Performance: What has LKO’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
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Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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.