While small-cap stocks, such as Oil Country Tubular Limited (NSEI:OILCOUNTUB) with its market cap of ₹2.42B, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the energy services industry, especially ones that are currently loss-making, are inclined towards being higher risk. Assessing first and foremost the financial health is vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into OILCOUNTUB here.
How does OILCOUNTUB’s operating cash flow stack up against its debt?
OILCOUNTUB’s debt levels surged from ₹1,308.6M to ₹1,407.9M over the last 12 months . With this rise in debt, OILCOUNTUB’s cash and short-term investments stands at ₹72.3M , ready to deploy into the business. Moreover, OILCOUNTUB has generated cash from operations of ₹20.8M in the last twelve months, leading to an operating cash to total debt ratio of 1.48%, signalling that OILCOUNTUB’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires a positive net income. In OILCOUNTUB’s case, it is able to generate 0.01x cash from its debt capital.
Can OILCOUNTUB pay its short-term liabilities?
With current liabilities at ₹1,776.8M liabilities, it seems that the business is not able to meet these obligations given the level of current assets of ₹1,128.1M, with a current ratio of 0.63x below the prudent level of 3x.
Does OILCOUNTUB face the risk of succumbing to its debt-load?
With debt reaching 93.69% of equity, OILCOUNTUB may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since OILCOUNTUB is presently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
Are you a shareholder? With a high level of debt on its balance sheet, OILCOUNTUB 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 OILCOUNTUB to increase its operational efficiency. In addition to this, the company may struggle to meet its near term liabilities should an adverse event occur. Going forward, OILCOUNTUB’s financial situation may change. You should always be keeping abreast of market expectations for OILCOUNTUB’s future growth on our free analysis platform.