Oceania Natural Limited (NZSE:ONL) is a small-cap stock with a market capitalization of NZ$37.19M. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Since ONL is loss-making right now, it’s essential to understand the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. However, since I only look at basic financial figures, I suggest you dig deeper yourself into ONL here.
Does ONL generate an acceptable amount of cash through operations?
ONL has shrunken its total debt levels in the last twelve months, from NZ$1.2M to NZ$1.0M , which comprises of short- and long-term debt. With this debt payback, ONL currently has NZ$1.5M remaining in cash and short-term investments for investing into the business. However, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can take a look at some of ONL’s operating efficiency ratios such as ROA here.
Can ONL meet its short-term obligations with the cash in hand?
At the current liabilities level of NZ$1.0M liabilities, the company has been able to meet these obligations given the level of current assets of NZ$6.2M, with a current ratio of 6.28x. Though, anything above 3x is considered high and could mean that ONL has too much idle capital in low-earning investments.
Is ONL’s level of debt at an acceptable level?
With a debt-to-equity ratio of 52.77%, ONL can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since ONL is presently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
Are you a shareholder? ONL’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Given that its financial position may be different. I recommend researching market expectations for ONL’s future growth on our free analysis platform.