Is Kosmos Energy Ltd’s (NYSE:KOS) Balance Sheet A Threat To Its Future?
Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as Kosmos Energy Ltd (NYSE:KOS) with a market-capitalization of US$2.48B, rarely draw their attention. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. This article will examine KOS’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into KOS here. See our latest analysis for Kosmos Energy
Does KOS generate an acceptable amount of cash through operations?
Over the past year, KOS has maintained its debt levels at around US$1.28B comprising of short- and long-term debt. At this current level of debt, KOS’s cash and short-term investments stands at US$234.43M for investing into the business. Moreover, KOS has generated cash from operations of US$236.62M in the last twelve months, leading to an operating cash to total debt ratio of 18.45%, indicating that KOS’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 loss making companies as traditional metrics such as return on asset (ROA) requires positive earnings. In KOS’s case, it is able to generate 0.18x cash from its debt capital.
Can KOS pay its short-term liabilities?
With current liabilities at US$428.73M, it appears that the company has been able to meet these obligations given the level of current assets of US$533.60M, with a current ratio of 1.24x. For Oil and Gas 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 KOS face the risk of succumbing to its debt-load?
KOS is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since KOS is currently unprofitable, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
KOS’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for KOS’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Kosmos Energy to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for KOS’s future growth? Take a look at our free research report of analyst consensus for KOS’s outlook.
Valuation: What is KOS 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 KOS 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.
