U.S. Markets open in 6 hrs 3 mins

What You Should Know About SRC Energy Inc.'s (NYSEMKT:SRCI) Financial Strength

Simply Wall St

Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!

While small-cap stocks, such as SRC Energy Inc. (NYSEMKT:SRCI) with its market cap of US$1.0b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Understanding the company's financial health becomes vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. However, these checks don't give you a full picture, so I suggest you dig deeper yourself into SRCI here.

SRCI’s Debt (And Cash Flows)

SRCI's debt levels surged from US$539m to US$741m over the last 12 months , which includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at US$57m , ready to be used for running the business. Additionally, SRCI has generated US$554m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 75%, indicating that SRCI’s debt is appropriately covered by operating cash.

Does SRCI’s liquid assets cover its short-term commitments?

At the current liabilities level of US$327m, the company may not be able to easily meet these obligations given the level of current assets of US$204m, with a current ratio of 0.63x. The current ratio is calculated by dividing current assets by current liabilities.

AMEX:SRCI Historical Debt, July 16th 2019

Is SRCI’s debt level acceptable?

SRCI is a relatively highly levered company with a debt-to-equity of 45%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies.

Next Steps:

Although SRCI’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. However, its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I'm sure SRCI has company-specific issues impacting its capital structure decisions. I recommend you continue to research SRC Energy to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for SRCI’s future growth? Take a look at our free research report of analyst consensus for SRCI’s outlook.
  2. Valuation: What is SRCI 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 SRCI is currently mispriced by the market.
  3. 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.