Overseas Shipholding Group Inc (NYSE:OSG) is a small-cap stock with a market capitalization of US$269m. 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, even ones that are profitable, tend to be high risk. So, understanding the company’s financial health becomes vital. I believe these basic checks tell most of the story you need to know. However, this commentary is still very high-level, so I suggest you dig deeper yourself into OSG here.
How does OSG’s operating cash flow stack up against its debt?
Over the past year, OSG has reduced its debt from US$509m to US$377m , which is made up of current and long term debt. With this debt payback, the current cash and short-term investment levels stands at US$131m for investing into the business. On top of this, OSG has produced cash from operations of US$59m in the last twelve months, resulting in an operating cash to total debt ratio of 16%, indicating that OSG’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In OSG’s case, it is able to generate 0.16x cash from its debt capital.
Does OSG’s liquid assets cover its short-term commitments?
Looking at OSG’s most recent US$35m liabilities, the company has been able to meet these obligations given the level of current assets of US$166m, with a current ratio of 4.81x. Having said that, a ratio greater than 3x may be considered as quite high, and some might argue OSG could be holding too much capital in a low-return investment environment.
Does OSG face the risk of succumbing to its debt-load?
With total debt exceeding equities, OSG is considered a highly levered company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. 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 OSG’s case, the ratio of 1.14x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as OSG’s low interest coverage already puts the company at higher risk of default.
OSG’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Though, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for OSG’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Overseas Shipholding Group to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for OSG’s future growth? Take a look at our free research report of analyst consensus for OSG’s outlook.
- Valuation: What is OSG 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 OSG 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.
To help readers see past 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. For errors that warrant correction please contact the editor at firstname.lastname@example.org.