What does Top Ships Inc’s (NASDAQ:TOPS) Balance Sheet Tell Us About Its Future?
While small-cap stocks, such as Top Ships Inc (NASDAQ:TOPS) with its market cap of US$14.94M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Oil and Gas industry, especially ones that are currently loss-making, tend to be high risk. Evaluating financial health as part of your investment thesis is vital. Here are few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into TOPS here.
How does TOPS’s operating cash flow stack up against its debt?
TOPS has built up its total debt levels in the last twelve months, from US$84.54M to US$103.95M – this includes both the current and long-term debt. With this growth in debt, TOPS currently has US$24.08M remaining in cash and short-term investments , ready to deploy into the business. Moreover, TOPS has produced cash from operations of US$695.00K over the same time period, leading to an operating cash to total debt ratio of 0.67%, indicating that TOPS’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency for unprofitable businesses as traditional metrics such as return on asset (ROA) requires a positive net income. In TOPS’s case, it is able to generate 0.0067x cash from its debt capital.
Does TOPS’s liquid assets cover its short-term commitments?
At the current liabilities level of US$25.58M liabilities, the company has been able to meet these obligations given the level of current assets of US$29.06M, with a current ratio of 1.14x. For Oil and Gas companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Is TOPS’s debt level acceptable?
TOPS is a relatively highly levered company with a debt-to-equity of 96.90%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since TOPS is currently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
At its current level of cash flow coverage, TOPS has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for TOPS’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Top Ships to get a more holistic view of the stock by looking at:
Historical Performance: What has TOPS’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 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.
