Is Exterran Corporation’s (NYSE:EXTN) Balance Sheet A Threat To Its Future?
Exterran Corporation (NYSE:EXTN) is a small-cap stock with a market capitalization of US$936.95m. 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? Energy Services companies, even ones that are profitable, tend to be high risk. Assessing first and foremost the financial health is crucial. I believe these basic checks tell most of the story you need to know. Though, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into EXTN here.
How much cash does EXTN generate through its operations?
Over the past year, EXTN has ramped up its debt from US$348.97m to US$368.47m , which comprises of short- and long-term debt. With this rise in debt, EXTN’s cash and short-term investments stands at US$49.15m for investing into the business. On top of this, EXTN has generated cash from operations of US$148.63m over the same time period, resulting in an operating cash to total debt ratio of 40.34%, signalling that EXTN’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In EXTN’s case, it is able to generate 0.4x cash from its debt capital.
Does EXTN’s liquid assets cover its short-term commitments?
At the current liabilities level of US$408.52m liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$542.57m, leading to a 1.33x current account ratio. For Energy Services companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does EXTN face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 70.18%, EXTN can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In EXTN’s case, the ratio of 2.16x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as EXTN’s low interest coverage already puts the company at higher risk of default.
Next Steps:
EXTN’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how EXTN has been performing in the past. You should continue to research Exterran to get a better picture of the small-cap by looking at:
Historical Performance: What has EXTN’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.
