Approach Resources, Inc. (NASDAQ:AREX) is a small-cap stock with a market capitalization of US$89m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Companies operating in the Oil and Gas industry, even ones that are profitable, tend to be high risk. So, understanding the company’s financial health becomes crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, since I only look at basic financial figures, 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 sustained its debt level by about US$379m over the last 12 months including long-term debt. At this constant level of debt, the current cash and short-term investment levels stands at US$22k for investing into the business. On top of this, AREX has produced cash from operations of US$37m over the same time period, leading to an operating cash to total debt ratio of 9.8%, meaning that AREX’s debt is not appropriately covered by operating cash. 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 0.098x cash from its debt capital.
Can AREX pay its short-term liabilities?
Looking at AREX’s US$41m in current liabilities, the company may not have an easy time meeting these commitments with a current assets level of US$14m, leading to a current ratio of 0.35x.
Does AREX face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 64%, AREX can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses.
AREX’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for AREX’s financial health. Other important fundamentals need to be considered alongside. 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.
- Valuation: What is AREX 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 AREX is currently mispriced by the market.
- 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 past 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. For errors that warrant correction please contact the editor at firstname.lastname@example.org.