Key Energy Services Inc (NYSE:KEG) is a small-cap stock with a market capitalization of US$313.78M. 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 Energy Services industry, especially ones that are currently loss-making, are inclined towards being higher risk. So, understanding the company’s financial health becomes crucial. Here are few basic financial health checks you should consider before taking the plunge. However, this commentary is still very high-level, so I suggest you dig deeper yourself into KEG here.
Does KEG generate enough cash through operations?
Over the past year, KEG has maintained its debt levels at around US$245.60M comprising of short- and long-term debt. At this current level of debt, the current cash and short-term investment levels stands at US$73.07M 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 KEG’s operating efficiency ratios such as ROA here.
Does KEG’s liquid assets cover its short-term commitments?
With current liabilities at US$103.78M, the company has been able to meet these obligations given the level of current assets of US$186.80M, with a current ratio of 1.8x. Generally, for Energy Services companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can KEG service its debt comfortably?
Since total debt levels have outpaced equities, KEG is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since KEG is currently 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.
At its current level of cash flow coverage, KEG has room for improvement to better cushion for events which may require debt repayment. 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 KEG has company-specific issues impacting its capital structure decisions. I suggest you continue to research Key Energy Services to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for KEG’s future growth? Take a look at our free research report of analyst consensus for KEG’s outlook.
- Valuation: What is KEG 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 KEG 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 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.