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While small-cap stocks, such as Transocean Ltd. (NYSE:RIG) with its market cap of US$3.8b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since RIG is loss-making right now, it’s crucial to understand the current state of its operations and pathway to profitability. The following basic checks can help you get a picture of the company's balance sheet strength. However, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into RIG here.
Does RIG Produce Much Cash Relative To Its Debt?
RIG has sustained its debt level by about US$10b over the last 12 months which accounts for long term debt. At this stable level of debt, RIG currently has US$1.9b remaining in cash and short-term investments , ready to be used for running the business. On top of this, RIG has generated cash from operations of US$404m during the same period of time, resulting in an operating cash to total debt ratio of 4.0%, signalling that RIG’s debt is not covered by operating cash.
Can RIG pay its short-term liabilities?
Looking at RIG’s US$1.4b in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.72x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Energy Services companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Is RIG’s debt level acceptable?
With a debt-to-equity ratio of 77%, RIG can be considered as an above-average leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. However, since RIG is currently loss-making, 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.
RIG’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around RIG's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for RIG's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Transocean to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for RIG’s future growth? Take a look at our free research report of analyst consensus for RIG’s outlook.
- Valuation: What is RIG 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 RIG 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.
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 firstname.lastname@example.org. 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.