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While small-cap stocks, such as Public Joint-Stock Company “Second Generating Company of the Electric Power Wholesale Market” (MCX:OGKB) with its market cap of RUруб36.34b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. 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 OGKB here.
Does OGKB produce enough cash relative to debt?
Over the past year, OGKB has reduced its debt from RUруб67.33b to RUруб57.40b , which comprises of short- and long-term debt. With this debt payback, OGKB’s cash and short-term investments stands at RUруб12.76b for investing into the business. Moreover, OGKB has generated RUруб27.64b in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 48.15%, indicating that OGKB’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In OGKB’s case, it is able to generate 0.48x cash from its debt capital.
Can OGKB pay its short-term liabilities?
With current liabilities at RUруб17.25b, the company has been able to meet these commitments with a current assets level of RUруб36.80b, leading to a 2.13x current account ratio. Generally, for Renewable Energy 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.
Is OGKB’s debt level acceptable?
With debt reaching 45.70% of equity, OGKB 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. We can check to see whether OGKB is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In OGKB’s, case, the ratio of 2.89x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
Next Steps:
Although OGKB’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around OGKB’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for OGKB’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Second Generating Company of the Electric Power Wholesale Market to get a more holistic view of the small-cap by looking at: