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Investors are always looking for growth in small-cap stocks like Flex LNG Ltd (OB:FLNG), with a market cap of ØRE4.25B. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Oil and Gas industry, in particular ones that run negative earnings, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is vital. I believe these basic checks tell most of the story you need to know. However, this commentary is still very high-level, so I recommend you dig deeper yourself into FLNG here.
Does FLNG generate enough cash through operations?
Over the past year, FLNG has ramped up its debt from US$7.00M to US$160.00M – this includes both the current and long-term debt. With this increase in debt, the current cash and short-term investment levels stands at US$9.96M 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. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of FLNG’s operating efficiency ratios such as ROA here.
Does FLNG’s liquid assets cover its short-term commitments?
At the current liabilities level of US$4.41M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$17.57M, with a current ratio of 3.99x. However, anything about 3x may be excessive, since FLNG may be leaving too much capital in low-earning investments.
Is FLNG’s debt level acceptable?
With a debt-to-equity ratio of 30.76%, FLNG’s debt level may be seen as prudent. This range is considered safe as FLNG is not taking on too much debt obligation, which may be constraining for future growth. Investors’ risk associated with debt is very low with FLNG, and the company has plenty of headroom and ability to raise debt should it need to in the future.
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FLNG’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, 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 FLNG has been performing in the past. You should continue to research Flex LNG to get a better picture of the stock by looking at: