Investors are always looking for growth in small-cap stocks like Roan Resources, Inc. (NYSE:ROAN), with a market cap of US$1.5b. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Oil and Gas industry, especially ones that are currently loss-making, tend to be high 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. Though, I know these factors are very high-level, so I recommend you dig deeper yourself into ROAN here.
Does ROAN produce enough cash relative to debt?
ROAN’s debt levels surged from US$85m to US$395m over the last 12 months – this includes long-term debt. With this increase in debt, ROAN’s cash and short-term investments stands at US$3.9m , ready to deploy into the business. Additionally, ROAN has generated US$208m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 53%, signalling that ROAN’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for unprofitable businesses since metrics such as return on asset (ROA) requires positive earnings. In ROAN’s case, it is able to generate 0.53x cash from its debt capital.
Can ROAN pay its short-term liabilities?
With current liabilities at US$416m, it seems that the business may not have an easy time meeting these commitments with a current assets level of US$233m, leading to a current ratio of 0.56x.
Is ROAN’s debt level acceptable?
ROAN’s level of debt is appropriate relative to its total equity, at 29%. ROAN is not taking on too much debt commitment, which may be constraining for future growth. Risk around debt is very low for ROAN, and the company also has the ability and headroom to increase debt if needed going forward.
ROAN’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. However, 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 ROAN’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Roan Resources to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ROAN’s future growth? Take a look at our free research report of analyst consensus for ROAN’s outlook.
- Historical Performance: What has ROAN’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 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.
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