While small-cap stocks, such as Cooper Energy Limited (ASX:COE) with its market cap of AU$673m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Oil and Gas companies, even ones that are profitable, tend to be high risk. So, understanding the company’s financial health becomes crucial. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, I know these factors are very high-level, so I suggest you dig deeper yourself into COE here.
Does COE produce enough cash relative to debt?
COE has increased its debt level by about AU$117m over the last 12 months including long-term debt. With this increase in debt, COE currently has AU$237m remaining in cash and short-term investments , ready to deploy into the business. On top of this, COE has produced cash from operations of AU$22m during the same period of time, resulting in an operating cash to total debt ratio of 19%, meaning that COE’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In COE’s case, it is able to generate 0.19x cash from its debt capital.
Can COE pay its short-term liabilities?
At the current liabilities level of AU$134m, it seems that the business has been able to meet these commitments with a current assets level of AU$288m, leading to a 2.15x 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 COE face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 26%, COE’s debt level may be seen as prudent. COE is not taking on too much debt commitment, which may be constraining for future growth.
Next Steps:
COE has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how COE has been performing in the past. You should continue to research Cooper Energy to get a more holistic view of the stock by looking at:
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Future Outlook: What are well-informed industry analysts predicting for COE’s future growth? Take a look at our free research report of analyst consensus for COE’s outlook.
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Valuation: What is COE 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 COE is currently mispriced by the market.
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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 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.