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Athabasca Oil Corporation (TSE:ATH) is a small-cap stock with a market capitalization of CA$381m. 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? Since ATH is loss-making right now, it’s essential to evaluate 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, this is not a comprehensive overview, so I’d encourage you to dig deeper yourself into ATH here.
ATH’s Debt (And Cash Flows)
Over the past year, ATH has ramped up its debt from CA$541m to CA$570m , which accounts for long term debt. With this rise in debt, the current cash and short-term investment levels stands at CA$272m , ready to be used for running the business. On top of this, ATH has generated cash from operations of CA$69m in the last twelve months, resulting in an operating cash to total debt ratio of 12%, indicating that ATH’s debt is not covered by operating cash.
Does ATH’s liquid assets cover its short-term commitments?
At the current liabilities level of CA$186m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.63x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Oil and Gas companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does ATH face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 49%, ATH 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. Though, since ATH is currently unprofitable, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Although ATH’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around ATH's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure ATH has company-specific issues impacting its capital structure decisions. You should continue to research Athabasca Oil to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ATH’s future growth? Take a look at our free research report of analyst consensus for ATH’s outlook.
- Historical Performance: What has ATH'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.
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.
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