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While small-cap stocks, such as Oil Country Tubular Limited (NSEI:OILCOUNTUB) with its market cap of ₹981.01M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Energy Services 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. I believe these basic checks tell most of the story you need to know. Though, since I only look at basic financial figures, I suggest you dig deeper yourself into OILCOUNTUB here.
Does OILCOUNTUB generate an acceptable amount of cash through operations?
OILCOUNTUB has shrunken its total debt levels in the last twelve months, from ₹1.41B to ₹1.22B . With this debt payback, OILCOUNTUB’s cash and short-term investments stands at ₹35.45M , ready to deploy 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. For this article’s sake, I won’t be looking at this today, but you can examine some of OILCOUNTUB’s operating efficiency ratios such as ROA here.
Can OILCOUNTUB meet its short-term obligations with the cash in hand?
Looking at OILCOUNTUB’s most recent ₹1.94B liabilities, it appears that the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.57x, which is below the prudent industry ratio of 3x.
Does OILCOUNTUB face the risk of succumbing to its debt-load?
Since total debt levels have outpaced equities, OILCOUNTUB is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since OILCOUNTUB is currently loss-making, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
OILCOUNTUB’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for OILCOUNTUB’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Oil Country Tubular to get a better picture of the stock by looking at: