While small-cap stocks, such as Steppe Gold Ltd (TSE:STGO) with its market cap of CA$49.4m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that STGO is not presently profitable, it’s vital to understand the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. However, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into STGO here.
Does STGO produce enough cash relative to debt?
In the previous 12 months, STGO’s rose by about CA$22.7m comprising of short- and long-term debt. With this ramp up in debt, STGO currently has CA$15.0m remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of STGO’s operating efficiency ratios such as ROA here.
Does STGO’s liquid assets cover its short-term commitments?
At the current liabilities level of CA$7.6m liabilities, the company has been able to meet these obligations given the level of current assets of CA$16.8m, with a current ratio of 2.2x. For Metals and Mining companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does STGO face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 78.2%, STGO can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. However, since STGO is presently loss-making, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
STGO’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure STGO has company-specific issues impacting its capital structure decisions. I suggest you continue to research Steppe Gold to get a better picture of the stock by looking at:
- Valuation: What is STGO 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 STGO is currently mispriced by the market.
- Historical Performance: What has STGO’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.
- 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.