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Investors are always looking for growth in small-cap stocks like Brookside Energy Limited (ASX:BRK), with a market cap of AU$15.8m. However, an important fact which most ignore is: how financially healthy is the business? Oil and Gas companies, in particular ones that run negative earnings, are more likely to be higher risk. Assessing first and foremost the financial health is vital. I believe these basic checks tell most of the story you need to know. Though, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into BRK here.
How much cash does BRK generate through its operations?
BRK’s debt levels surged from AU$672.6k to AU$3.7m over the last 12 months – this includes both the current and long-term debt. With this increase in debt, the current cash and short-term investment levels stands at AU$2.7m for investing into the business. Moving onto cash from operations, 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. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of BRK’s operating efficiency ratios such as ROA here.
Does BRK’s liquid assets cover its short-term commitments?
Looking at BRK’s most recent AU$217.5k liabilities, it seems that the business has been able to meet these obligations given the level of current assets of AU$4.7m, with a current ratio of 21.8x. However, a ratio greater than 3x may be considered as too high, as BRK could be holding too much capital in a low-return investment environment.
Can BRK service its debt comfortably?
With debt reaching 46.6% of equity, BRK 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 BRK is currently loss-making, 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, BRK has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how BRK has been performing in the past. I suggest you continue to research Brookside Energy to get a more holistic view of the stock by looking at: