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Investors are always looking for growth in small-cap stocks like TerraCom Limited (ASX:TER), with a market cap of AU$94.27M. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Oil and Gas industry, even ones that are profitable, tend to be high risk. So, understanding the company’s financial health becomes vital. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into TER here.
Does TER generate enough cash through operations?
TER has built up its total debt levels in the last twelve months, from AU$161.21M to AU$186.38M , which is made up of current and long term debt. With this increase in debt, TER’s cash and short-term investments stands at AU$8.59M , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, 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 examine some of TER’s operating efficiency ratios such as ROA here.
Does TER’s liquid assets cover its short-term commitments?
At the current liabilities level of AU$68.10M liabilities, it appears that the company is not able to meet these obligations given the level of current assets of AU$21.41M, with a current ratio of 0.31x below the prudent level of 3x.
Can TER service its debt comfortably?
Since total debt levels have outpaced equities, TER is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible.
Next Steps:
TER’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. 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 TER has been performing in the past. I recommend you continue to research TerraCom to get a better picture of the stock by looking at:
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Valuation: What is TER worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether TER is currently mispriced by the market.
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Historical Performance: What has TER’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
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Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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.