Investors are always looking for growth in small-cap stocks like Fremont Petroleum Corporation Limited (ASX:FPL), with a market cap of AU$4.74M. However, an important fact which most ignore is: how financially healthy is the business? Oil and Gas companies, especially ones that are currently loss-making, are more likely to be higher 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. Nevertheless, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into FPL here.
Does FPL generate enough cash through operations?
FPL has increased its debt level by about AU$846.63K over the last 12 months made up of predominantly near term debt. With this ramp up in debt, the current cash and short-term investment levels stands at AU$72.34K , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, 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 FPL’s operating efficiency ratios such as ROA here.
Can FPL pay its short-term liabilities?
At the current liabilities level of AU$1.68M liabilities, it appears that the company has not been able to meet these commitments with a current assets level of AU$141.76K, leading to a 0.084x current account ratio. which is under the appropriate industry ratio of 3x.
Is FPL’s debt level acceptable?
FPL’s level of debt is low relative to its total equity, at 7.24%. This range is considered safe as FPL is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. FPL’s risk around capital structure is almost non-existent, and the company has the 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. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented 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. You should continue to research Fremont Petroleum to get a more holistic view of the stock by looking at the areas below. Just a heads up – to access some parts of the Simply Wall St research tool you might be asked to create a free account, but it takes just one click and the information they provide is definitely worth it in my opinion.