Ensco Rowan plc (NYSE:ESV) is a small-cap stock with a market capitalization of US$1.6b. 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? Given that ESV is not presently profitable, it’s essential to assess the current state of its operations and pathway to profitability. We'll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, potential investors would need to take a closer look, and I recommend you dig deeper yourself into ESV here.
ESV’s Debt (And Cash Flows)
ESV's debt level has been constant at around US$5.1b over the previous year which accounts for long term debt. At this stable level of debt, ESV's cash and short-term investments stands at US$543m , ready to be used for running the business. Moving on, operating cash flow was negative over the last twelve months. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of ESV’s operating efficiency ratios such as ROA here.
Can ESV meet its short-term obligations with the cash in hand?
With current liabilities at US$517m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.34x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Energy Services companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Is ESV’s debt level acceptable?
ESV is a relatively highly levered company with a debt-to-equity of 64%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. But since ESV is presently unprofitable, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
ESV’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. Since there is also no concerns around ESV's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for ESV's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Ensco Rowan to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ESV’s future growth? Take a look at our free research report of analyst consensus for ESV’s outlook.
- Valuation: What is ESV 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 ESV 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.
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