Investors are always looking for growth in small-cap stocks like Southcross Energy Partners LP. (NYSE:SXE), with a market cap of US$149.25M. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Oil and Gas industry, especially ones that are currently loss-making, tend to be high risk. So, understanding the company’s financial health becomes vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into SXE here.

How does SXE’s operating cash flow stack up against its debt?

SXE has shrunken its total debt levels in the last twelve months, from US$549.27M to US$519.34M , which is made up of current and long term debt. With this reduction in debt, the current cash and short-term investment levels stands at US$5.22M for investing into the business. Additionally, SXE has produced US$26.18M in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 5.04%, meaning that SXE’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires positive earnings. In SXE’s case, it is able to generate 0.05x cash from its debt capital.

Can SXE pay its short-term liabilities?

With current liabilities at US$75.39M, it seems that the business has not been able to meet these commitments with a current assets level of US$75.39M, leading to a 1x current account ratio. which is under the appropriate industry ratio of 3x.

Is SXE’s debt level acceptable?

Since total debt levels have outpaced equities, SXE 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. But since SXE is currently loss-making, sustainability of its current state of operations becomes a concern. 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:

SXE’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven’t considered other factors such as how SXE has been performing in the past. You should continue to research Southcross Energy Partners to get a better picture of the stock by looking at: