U.S. Markets open in 7 hrs 19 mins

Advantage Oil & Gas Ltd (TSE:AAV): Time For A Financial Health Check

Will Harmon

While small-cap stocks, such as Advantage Oil & Gas Ltd (TSX:AAV) with its market cap of CA$720.61M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Oil and Gas industry, even ones that are profitable, are inclined towards being higher risk. Assessing first and foremost the financial health is crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into AAV here.

Does AAV generate an acceptable amount of cash through operations?

AAV’s debt levels surged from CA$153.10M to CA$208.98M over the last 12 months , which comprises of short- and long-term debt. With this increase in debt, AAV’s cash and short-term investments stands at CA$6.92M , ready to deploy into the business. Additionally, AAV has generated cash from operations of CA$186.40M during the same period of time, resulting in an operating cash to total debt ratio of 89.20%, signalling that AAV’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In AAV’s case, it is able to generate 0.89x cash from its debt capital.

Can AAV meet its short-term obligations with the cash in hand?

At the current liabilities level of CA$51.12M liabilities, it seems that the business has been able to meet these commitments with a current assets level of CA$70.29M, leading to a 1.38x current account ratio. For Oil and Gas companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

TSX:AAV Historical Debt May 7th 18

Can AAV service its debt comfortably?

AAV’s level of debt is appropriate relative to its total equity, at 17.94%. AAV is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether AAV is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In AAV’s, case, the ratio of 12.82x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as AAV’s high interest coverage is seen as responsible and safe practice.

Next Steps:

AAV has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, 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 AAV has been performing in the past. You should continue to research Advantage Oil & Gas to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for AAV’s future growth? Take a look at our free research report of analyst consensus for AAV’s outlook.
  2. Valuation: What is AAV 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 AAV is currently mispriced by the market.
  3. 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 pass 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.