Investors are always looking for growth in small-cap stocks like Toro Energy Limited (ASX:TOE), with a market cap of A$80.32M. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the oil and gas industry, especially ones that are currently loss-making, are inclined towards being higher risk. Assessing first and foremost the financial health is crucial. Here are few basic financial health checks you should consider before taking the plunge. However, since I only look at basic financial figures, I suggest you dig deeper yourself into TOE here.
Does TOE generate an acceptable amount of cash through operations?
TOE has built up its total debt levels in the last twelve months, from A$12.0M to A$14.2M – this includes both the current and long-term debt. With this rise in debt, TOE’s cash and short-term investments stands at A$6.6M for investing into the business. However, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, 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 assess some of TOE’s operating efficiency ratios such as ROA here.
Does TOE’s liquid assets cover its short-term commitments?
At the current liabilities level of A$14.5M liabilities, the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.56x, which is below the prudent industry ratio of 3x.
Is TOE’s level of debt at an acceptable level?
With a debt-to-equity ratio of 28.71%, TOE’s debt level may be seen as prudent. This range is considered safe as TOE is not taking on too much debt obligation, which may be constraining for future growth. TOE’s risk around capital structure is low, and the company has the headroom and ability to raise debt should it need to in the future.
Next Steps:
Are you a shareholder? TOE’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. Furthermore, the company may struggle to meet its near term liabilities should an adverse event occur. Given that its financial position may change. I suggest keeping on top of market expectations for TOE’s future growth on our free analysis platform.
Are you a potential investor? TOE seems to have a sensible level of debt, meaning there’s some room to take on more debt if needed. But its current cash flow coverage of existing debt, in addition to the low liquidity, is concerning. However, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of TOE’s track record. I encourage you to continue your research by taking a look at TOE’s past performance analysis on our free platform to conclude on TOE’s financial health.
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.