In This Article:
Cortus Energy AB (publ) (OM:CE) is a small-cap stock with a market capitalization of KR197.21M. 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? Companies operating in the Oil and Gas industry, especially ones that are currently loss-making, are more likely to be higher risk. Assessing first and foremost the financial health is essential. 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 suggest you dig deeper yourself into CE here.
How does CE’s operating cash flow stack up against its debt?
In the previous 12 months, CE’s rose by about KR18.00M – this includes both the current and long-term debt. With this increase in debt, CE’s cash and short-term investments stands at KR23.06M for investing into the business. Moving onto cash from operations, 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 CE’s operating efficiency ratios such as ROA here.
Can CE meet its short-term obligations with the cash in hand?
At the current liabilities level of KR33.55M liabilities, it appears that the company has not been able to meet these commitments with a current assets level of KR32.42M, leading to a 0.97x current account ratio. which is under the appropriate industry ratio of 3x.
Is CE’s debt level acceptable?
With debt reaching 40.59% of equity, CE may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since CE is currently unprofitable, sustainability of its current state of operations becomes a concern. 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:
At its current level of cash flow coverage, CE has room for improvement to better cushion for events which may require debt repayment. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven’t considered other factors such as how CE has been performing in the past. I recommend you continue to research Cortus Energy to get a more holistic view of the stock by looking at: