Gulfsands Petroleum plc (AIM:GPX) is a small-cap stock with a market capitalization of UK£24.96M. 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? Companies operating in the Oil and Gas industry, especially ones that are currently loss-making, are more likely to be higher risk. Assessing first and foremost the financial health is essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, this commentary is still very high-level, so I recommend you dig deeper yourself into GPX here.
Does GPX generate an acceptable amount of cash through operations?
GPX’s debt levels have fallen from US$14.41M to US$0 over the last 12 months , 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$1.04M 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 assess some of GPX’s operating efficiency ratios such as ROA here.
Can GPX pay its short-term liabilities?
Looking at GPX’s most recent US$7.67M liabilities, it appears that the company is not able to meet these obligations given the level of current assets of US$2.30M, with a current ratio of 0.3x below the prudent level of 3x.
Does GPX face the risk of succumbing to its debt-load?
With debt at 3.49% of equity, GPX may be thought of as having low leverage. This range is considered safe as GPX is not taking on too much debt obligation, which may be constraining for future growth. Investors’ risk associated with debt is virtually non-existent with GPX, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Although GPX’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 low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven’t considered other factors such as how GPX has been performing in the past. You should continue to research Gulfsands Petroleum to get a better picture of the stock by looking at:
- 1. Valuation: What is GPX 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 GPX is currently mispriced by the market.
- 2. Historical Performance: What has GPX’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.