EV Energy Partners LP. (NASDAQ:EVEP) is a small-cap stock with a market capitalization of US$7.67M. 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? Oil and Gas companies, in particular ones that run negative earnings, 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. However, this commentary is still very high-level, so I recommend you dig deeper yourself into EVEP here.
Does EVEP generate an acceptable amount of cash through operations?
EVEP’s debt level has been constant at around US$605.55M over the previous year comprising of short- and long-term debt. At this stable level of debt, EVEP currently has US$4.90M remaining in cash and short-term investments for investing into the business. Moreover, EVEP has generated cash from operations of US$31.70M over the same time period, resulting in an operating cash to total debt ratio of 5.23%, indicating that EVEP’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency for unprofitable companies since metrics such as return on asset (ROA) requires positive earnings. In EVEP’s case, it is able to generate 0.052x cash from its debt capital.
Can EVEP pay its short-term liabilities?
Looking at EVEP’s most recent US$653.96M liabilities, it seems that the business has not been able to meet these commitments with a current assets level of US$61.43M, leading to a 0.094x current account ratio. which is under the appropriate industry ratio of 3x.
Is EVEP’s debt level acceptable?
EVEP is a relatively highly levered company with a debt-to-equity of 96.42%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since EVEP is currently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
With a high level of debt on its balance sheet, EVEP 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 EVEP to increase its operational efficiency. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for EVEP’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research EV Energy Partners to get a more holistic view of the stock by looking at:
1. Valuation: What is EVEP 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 EVEP is currently mispriced by the market.
2. Historical Performance: What has EVEP’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.