What You Must Know About Ensign Energy Services Inc.’s (TSE:ESI) Financial Strength
While small-cap stocks, such as Ensign Energy Services Inc. (TSE:ESI) with its market cap of CA$825m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Energy Services companies, especially ones that are currently loss-making, tend to be high risk. Evaluating financial health as part of your investment thesis is vital. I believe these basic checks tell most of the story you need to know. Though, since I only look at basic financial figures, I suggest you dig deeper yourself into ESI here.
Does ESI produce enough cash relative to debt?
ESI’s debt levels surged from CA$732m to CA$772m over the last 12 months , which accounts for long term debt. With this growth in debt, ESI’s cash and short-term investments stands at CA$41m for investing into the business. Moreover, ESI has generated CA$129m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 17%, meaning that ESI’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency for unprofitable businesses as traditional metrics such as return on asset (ROA) requires positive earnings. In ESI’s case, it is able to generate 0.17x cash from its debt capital.
Does ESI’s liquid assets cover its short-term commitments?
Looking at ESI’s CA$774m 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 0.48x.
Does ESI face the risk of succumbing to its debt-load?
ESI is a relatively highly levered company with a debt-to-equity of 50%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since ESI is presently unprofitable, there’s a question of sustainability of its current operations. 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:
Although ESI’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. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven’t considered other factors such as how ESI has been performing in the past. I recommend you continue to research Ensign Energy Services to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for ESI’s future growth? Take a look at our free research report of analyst consensus for ESI’s outlook.
Valuation: What is ESI 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 ESI 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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
