While small-cap stocks, such as Approach Resources Inc (NASDAQ:AREX) with its market cap of US$232.87m, 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, tend to be high risk. Evaluating financial health as part of your investment thesis is vital. Here are few basic financial health checks you should consider before taking the plunge. Though, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into AREX here.
How does AREX’s operating cash flow stack up against its debt?
AREX has shrunken its total debt levels in the last twelve months, from US$498.35m to US$373.46m – this includes both the current and long-term debt. With this debt repayment, the current cash and short-term investment levels stands at US$21.00k , ready to deploy into the business. Additionally, AREX has generated cash from operations of US$37.45m in the last twelve months, resulting in an operating cash to total debt ratio of 10.03%, meaning that AREX’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In AREX’s case, it is able to generate 0.1x cash from its debt capital.
Can AREX meet its short-term obligations with the cash in hand?
Looking at AREX’s most recent US$25.07m liabilities, it seems that the business has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.67x, which is below the prudent industry ratio of 3x.
Is AREX’s debt level acceptable?
AREX is a relatively highly levered company with a debt-to-equity of 62.43%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible.
AREX’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven’t considered other factors such as how AREX has been performing in the past. You should continue to research Approach Resources to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AREX’s future growth? Take a look at our free research report of analyst consensus for AREX’s outlook.
- Historical Performance: What has AREX’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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.