Investors are always looking for growth in small-cap stocks like Jones Energy Inc (DB:J5E), with a market cap of €56.22M. However, an important fact which most ignore is: how financially healthy is the business? Oil and Gas companies, in particular ones that run negative earnings, tend to be high risk. Evaluating financial health as part of your investment thesis is vital. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into J5E here.
Does J5E generate enough cash through operations?
Over the past year, J5E has maintained its debt levels at around US$759.32M – this includes both the current and long-term debt. At this constant level of debt, J5E currently has US$19.47M remaining in cash and short-term investments for investing into the business. Additionally, J5E has produced cash from operations of US$59.01M in the last twelve months, resulting in an operating cash to total debt ratio of 7.77%, indicating that J5E’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for unprofitable companies as traditional metrics such as return on asset (ROA) requires positive earnings. In J5E’s case, it is able to generate 0.078x cash from its debt capital.
Can J5E pay its short-term liabilities?
With current liabilities at US$166.49M, the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.63x, which is below the prudent industry ratio of 3x.
Does J5E face the risk of succumbing to its debt-load?
J5E 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. But since J5E 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.
J5E’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, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for J5E’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Jones Energy to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for J5E’s future growth? Take a look at our free research report of analyst consensus for J5E’s outlook.
- Historical Performance: What has J5E’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 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.