While small-cap stocks, such as ION Geophysical Corporation (NYSE:IO) with its market cap of $159.41M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the energy services industry, especially ones that are currently loss-making, are more likely to be higher risk. So, understanding the company’s financial health becomes essential. I believe these basic checks tell most of the story you need to know. Though, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into IO here.
Does IO generate an acceptable amount of cash through operations?
IO has shrunken its total debt levels in the last twelve months, from $183.0M to $158.8M – this includes both the current and long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at $52.7M , ready to deploy into the business. On top of this, IO has produced cash from operations of $1.6M over the same time period, resulting in an operating cash to total debt ratio of 0.01x, indicating that IO’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency for unprofitable companies as traditional metrics such as return on asset (ROA) requires a positive net income. In IO’s case, it is able to generate 0.01x cash from its debt capital.
Can IO meet its short-term obligations with the cash in hand?
At the current liabilities level of $95.1M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of $111.6M, with a current ratio of 1.17x. Generally, for energy services companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Can IO service its debt comfortably?
IO is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since IO 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.
Are you a shareholder? IO’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. In addition to this, the company may not be able to pay all of its upcoming liabilities from its current short-term assets. Moving forward, its financial position may change. I recommend researching market expectations for IO’s future growth on our free analysis platform.
Are you a potential investor? IO’s high debt levels on top of poor cash coverage as well as low liquidity coverage of near-term obligations may not build the strongest investment case. However, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of IO’s track record. I encourage you to continue your research by taking a look at IO’s past performance analysis on our free platform in order to determine for yourself whether its debt position is justified.
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.