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Investors are always looking for growth in small-cap stocks like Eland Oil & Gas PLC (LON:ELA), with a market cap of UK£275m. 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 more likely to be higher risk. Assessing first and foremost the financial health is essential. Here are few basic financial health checks you should consider before taking the plunge. Though, I know these factors are very high-level, so I recommend you dig deeper yourself into ELA here.
Does ELA produce enough cash relative to debt?
ELA’s debt levels surged from US$14m to US$25m over the last 12 months , which accounts for long term debt. With this rise in debt, ELA currently has US$30m remaining in cash and short-term investments , ready to deploy into the business. Additionally, ELA has produced US$26m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 103%, indicating that ELA’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In ELA’s case, it is able to generate 1.03x cash from its debt capital.
Can ELA meet its short-term obligations with the cash in hand?
Looking at ELA’s US$91m in current liabilities, the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.81x.
Can ELA service its debt comfortably?
With a debt-to-equity ratio of 12%, ELA’s debt level may be seen as prudent. This range is considered safe as ELA is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether ELA is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In ELA’s, case, the ratio of 18.15x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
ELA has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. But, as shareholders, you should try and determine whether this level of debt is justified for ELA, especially when liquidity may also be an issue. I admit this is a fairly basic analysis for ELA’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Eland Oil & Gas to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ELA’s future growth? Take a look at our free research report of analyst consensus for ELA’s outlook.
- 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.
- 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.