While small-cap stocks, such as Eon NRG Limited (ASX:E2E) with its market cap of AU$3.60M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Oil and Gas companies, especially ones that are currently loss-making, are inclined towards being higher risk. So, understanding the company’s financial health becomes vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, I know these factors are very high-level, so I suggest you dig deeper yourself into E2E here.
Does E2E generate an acceptable amount of cash through operations?
E2E has shrunken its total debt levels in the last twelve months, from US$8.24M to US$7.77M , which comprises of short- and long-term debt. With this debt payback, E2E currently has US$658.45K remaining in cash and short-term investments , ready to deploy into the business. Moreover, E2E has generated US$183.40K in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 2.36%, indicating that E2E’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency for loss making companies since metrics such as return on asset (ROA) requires a positive net income. In E2E’s case, it is able to generate 0.024x cash from its debt capital.
Does E2E’s liquid assets cover its short-term commitments?
With current liabilities at US$2.71M, it seems that the business has been able to meet these commitments with a current assets level of US$3.82M, leading to a 1.41x current account ratio. Generally, for Oil and Gas companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Is E2E’s debt level acceptable?
With total debt exceeding equities, E2E is considered a highly levered company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. However, since E2E is presently unprofitable, there’s a question of sustainability of its current operations. 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:
E2E’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure E2E has company-specific issues impacting its capital structure decisions. I recommend you continue to research Eon NRG to get a more holistic view of the stock by looking at: