Française de l’Energie SA (EPA:LFDE) is a small-cap stock with a market capitalization of €69.1m. 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, in particular ones that run negative earnings, are inclined towards being higher risk. So, understanding the company’s financial health becomes essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, this commentary is still very high-level, so I suggest you dig deeper yourself into LFDE here.
How does LFDE’s operating cash flow stack up against its debt?
Over the past year, LFDE has ramped up its debt from €3.3m to €5.3m – this includes both the current and long-term debt. With this rise in debt, LFDE currently has below €10K remaining in cash and short-term investment, which is concerning. Moreover, 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. For this article’s sake, I won’t be looking at this today, but you can assess some of LFDE’s operating efficiency ratios such as ROA here.
Can LFDE pay its short-term liabilities?
With current liabilities at €11.5m, the company may not be able to easily meet these obligations given the level of current assets of €3.9m, with a current ratio of 0.34x.
Is LFDE’s debt level acceptable?
With a debt-to-equity ratio of 10.2%, LFDE’s debt level may be seen as prudent. This range is considered safe as LFDE is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. Investors’ risk associated with debt is very low with LFDE, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Next Steps:
Although LFDE’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. Furthermore, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for LFDE’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Française de l’Energie to get a more holistic view of the stock by looking at: