Investors are always looking for growth in small-cap stocks like Eland Oil & Gas PLC (AIM:ELA), with a market cap of UK£174.37M. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Oil and Gas industry, even ones that are profitable, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, this commentary is still very high-level, so I suggest you dig deeper yourself into ELA here.
Does ELA generate enough cash through operations?
Over the past year, ELA has maintained its debt levels at around US$13.33M comprising of short- and long-term debt. At this stable level of debt, ELA’s cash and short-term investments stands at US$11.14M for investing into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. 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 ELA’s operating efficiency ratios such as ROA here.
Can ELA pay its short-term liabilities?
Looking at ELA’s most recent US$40.41M liabilities, it appears that the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.33x, which is below the prudent industry ratio of 3x.
Does ELA face the risk of succumbing to its debt-load?
ELA’s level of debt is low relative to its total equity, at 8.94%. This range is considered safe as ELA is not taking on too much debt obligation, which may be constraining for future growth.
Although ELA’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. Furthermore, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven’t considered other factors such as how ELA has been performing in the past. I recommend you continue to research Eland Oil & Gas to get a more holistic view of the stock by looking at:
- 1. Valuation: What is ELA 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 ELA is currently mispriced by the market.
- 2. Historical Performance: What has ELA’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.