Laredo Petroleum, Inc. (NYSE:LPI) is a small-cap stock with a market capitalization of US$788m. 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 Oil and Gas industry, even ones that are profitable, are more likely to be higher risk. Assessing first and foremost the financial health is crucial. I believe these basic checks tell most of the story you need to know. However, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into LPI here.
How much cash does LPI generate through its operations?
Over the past year, LPI has ramped up its debt from US$792m to US$984m – this includes long-term debt. With this increase in debt, LPI’s cash and short-term investments stands at US$45m , ready to deploy into the business. Moreover, LPI has generated US$538m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 55%, indicating that LPI’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In LPI’s case, it is able to generate 0.55x cash from its debt capital.
Does LPI’s liquid assets cover its short-term commitments?
Looking at LPI’s US$200m in current liabilities, it seems that the business arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.96x.
Does LPI face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 84%, LPI can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In LPI’s case, the ratio of 6.76x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as LPI’s high interest coverage is seen as responsible and safe practice.
LPI’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. Though its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for LPI’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Laredo Petroleum to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for LPI’s future growth? Take a look at our free research report of analyst consensus for LPI’s outlook.
- Historical Performance: What has LPI’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.
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