Geo Energy Resources Limited (SGX:RE4) is a small-cap stock with a market capitalization of SGD352.26M. 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, even ones that are profitable, are more likely to be higher risk. So, understanding the company’s financial health becomes vital. Here are few basic financial health checks you should consider before taking the plunge. Though, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into RE4 here.

How does RE4’s operating cash flow stack up against its debt?

RE4 has shrunken its total debt levels in the last twelve months, from $78.7M to $68.7M , which is made up of current and long term debt. With this debt repayment, RE4 currently has $67.7M remaining in cash and short-term investments for investing into the business. On top of this, RE4 has generated cash from operations of $69.3M over the same time period, resulting in an operating cash to total debt ratio of 100.84%, indicating that RE4’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In RE4’s case, it is able to generate 1.01x cash from its debt capital.

Can RE4 pay its short-term liabilities?

At the current liabilities level of $114.4M liabilities, the company has been able to meet these commitments with a current assets level of $187.5M, leading to a 1.64x current account ratio. Usually, for Oil and Gas companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Does RE4 face the risk of succumbing to its debt-load?

With debt reaching 45.50% of equity, RE4 may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether RE4 is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In RE4’s, case, the ratio of 14.98x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

Although RE4’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for RE4’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Geo Energy Resources to get a more holistic view of the stock by looking at: