Investors are always looking for growth in small-cap stocks like Golden Energy and Resources Limited (SGX:AUE), with a market cap of S$577m. However, an important fact which most ignore is: how financially healthy is the business? Oil and Gas companies, even ones that are profitable, tend to be high risk. Evaluating financial health as part of your investment thesis is essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into AUE here.

Does AUE produce enough cash relative to debt?

AUE’s debt levels surged from US$55m to US$255m over the last 12 months , which includes long-term debt. With this rise in debt, AUE’s cash and short-term investments stands at US$170m for investing into the business. On top of this, AUE has produced US$139m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 54%, meaning that AUE’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In AUE’s case, it is able to generate 0.54x cash from its debt capital.

Can AUE pay its short-term liabilities?

Looking at AUE’s US$293m in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$483m, leading to a 1.65x current account ratio. Usually, for Oil and Gas companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.

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

With a debt-to-equity ratio of 55%, AUE can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In AUE’s case, the ratio of 22.24x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as AUE’s high interest coverage is seen as responsible and safe practice.

Next Steps:

Although AUE’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. Since there is also no concerns around AUE’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for AUE’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Golden Energy and Resources to get a more holistic view of the small-cap by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for AUE’s future growth? Take a look at our free research report of analyst consensus for AUE’s outlook.

2. Valuation: What is AUE 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 AUE is currently mispriced by the market.

3. 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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.