Fremont Petroleum Corporation Limited (ASX:FPL) is a small-cap stock with a market capitalization of AU$5.45M. 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? 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 crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, since I only look at basic financial figures, I recommend you dig deeper yourself into FPL here.
Does FPL generate an acceptable amount of cash through operations?
Over the past year, FPL has borrowed debt capital of around AU$846.63K . With this ramp up in debt, FPL’s cash and short-term investments stands at AU$72.34K for investing 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. For this article’s sake, I won’t be looking at this today, but you can assess some of FPL’s operating efficiency ratios such as ROA here.
Can FPL meet its short-term obligations with the cash in hand?
At the current liabilities level of AU$1.68M liabilities, the company is not able to meet these obligations given the level of current assets of AU$141.76K, with a current ratio of 0.084x below the prudent level of 3x.
Does FPL face the risk of succumbing to its debt-load?
FPL’s level of debt is appropriate relative to its total equity, at 15.18%. FPL is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. Investors’ risk associated with debt is very low with FPL, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Next Steps:
FPL’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Furthermore, its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I’m sure FPL has company-specific issues impacting its capital structure decisions. I suggest you continue to research Fremont Petroleum to get a more holistic view of the stock by looking at: