While small-cap stocks, such as Samson Oil & Gas Limited (ASX:SSN) with its market cap of A$6.57M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Oil and Gas companies, especially ones that are currently loss-making, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is essential. Here are few basic financial health checks you should consider before taking the plunge. Though, this commentary is still very high-level, so I suggest you dig deeper yourself into SSN here.
Does SSN generate enough cash through operations?
Over the past year, SSN has reduced its debt from $34.5M to $23.4M – this includes both the current and long-term debt. With this debt payback, SSN currently has $0.6M remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can take a look at some of SSN’s operating efficiency ratios such as ROA here.
Does SSN’s liquid assets cover its short-term commitments?
At the current liabilities level of $29.1M liabilities, the company has not been able to meet these commitments with a current assets level of $2.5M, leading to a 0.08x current account ratio. which is under the appropriate industry ratio of 3x.
Does SSN face the risk of succumbing to its debt-load?
Since total debt levels have outpaced equities, SSN is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since SSN is currently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
With a high level of debt on its balance sheet, SSN could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for SSN to increase its operational efficiency. In addition to this, the company may struggle to meet its near term liabilities should an adverse event occur. This is only a rough assessment of financial health, and I’m sure SSN has company-specific issues impacting its capital structure decisions. I recommend you continue to research Samson Oil & Gas to get a better picture of the stock by looking at:
- 1. Valuation: What is SSN 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 SSN is currently mispriced by the market.
- 2. Historical Performance: What has SSN’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.
- 3. 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.