What Investors Should Know About Genel Energy plc’s (LON:GENL) Financial Strength
Genel Energy plc (LON:GENL) is a small-cap stock with a market capitalization of UK£528m. 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, even ones that are profitable, are inclined towards being 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. However, since I only look at basic financial figures, I recommend you dig deeper yourself into GENL here.
Does GENL produce enough cash relative to debt?
GENL’s debt levels have fallen from US$404m to US$297m over the last 12 months , which includes long-term debt. With this debt payback, GENL’s cash and short-term investments stands at US$233m , ready to deploy into the business. Additionally, GENL has generated US$232m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 78%, indicating that GENL’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In GENL’s case, it is able to generate 0.78x cash from its debt capital.
Does GENL’s liquid assets cover its short-term commitments?
At the current liabilities level of US$53m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 6.35x. Having said that, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.
Is GENL’s debt level acceptable?
With debt at 18% of equity, GENL may be thought of as appropriately levered. This range is considered safe as GENL is not taking on too much debt obligation, which may be constraining for future growth. We can test if GENL’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For GENL, the ratio of 1.54x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as GENL’s low interest coverage already puts the company at higher risk of default.
Next Steps:
GENL has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for GENL’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Genel Energy to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for GENL’s future growth? Take a look at our free research report of analyst consensus for GENL’s outlook.
Valuation: What is GENL 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 GENL 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 editorial-team@simplywallst.com.
