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Cub Energy Inc. (CVE:KUB) is a small-cap stock with a market capitalization of CA$24m. 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? Assessing first and foremost the financial health is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, this is not a comprehensive overview, so I suggest you dig deeper yourself into KUB here.
Does KUB Produce Much Cash Relative To Its Debt?
KUB's debt level has been constant at around US$7.5m over the previous year including long-term debt. At this current level of debt, the current cash and short-term investment levels stands at US$7.0m to keep the business going. Additionally, KUB has produced cash from operations of US$887k over the same time period, resulting in an operating cash to total debt ratio of 12%, indicating that KUB’s operating cash is less than its debt.
Can KUB meet its short-term obligations with the cash in hand?
At the current liabilities level of US$9.9m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.01x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Oil and Gas companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is KUB’s debt level acceptable?
KUB is a relatively highly levered company with a debt-to-equity of 75%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses.
Although KUB’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around KUB's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how KUB has been performing in the past. I suggest you continue to research Cub Energy to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for KUB’s future growth? Take a look at our free research report of analyst consensus for KUB’s outlook.
- Historical Performance: What has KUB'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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.