Investors are always looking for growth in small-cap stocks like Jones Energy Inc (NYSE:JONE), with a market cap of $87.28M. However, an important fact which most ignore is: how financially healthy is the business? Oil and Gas companies, in particular ones that run negative earnings, are more likely to be higher risk. So, understanding the company’s financial health becomes essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, this commentary is still very high-level, so I recommend you dig deeper yourself into JONE here.
Does JONE generate an acceptable amount of cash through operations?
JONE’s debt levels have fallen from $837.7M to $724.0M over the last 12 months , which is made up of current and long term debt. With this reduction in debt, JONE currently has $34.6M remaining in cash and short-term investments , ready to deploy into the business. Moreover, JONE has generated $25.7M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 0.04x, meaning that JONE’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 companies since metrics such as return on asset (ROA) requires positive earnings. In JONE’s case, it is able to generate 0.04x cash from its debt capital.
Can JONE meet its short-term obligations with the cash in hand?
Looking at JONE’s most recent $107.8M liabilities, the company has not been able to meet these commitments with a current assets level of $99.3M, leading to a 0.92x current account ratio. which is under the appropriate industry ratio of 3x.
Can JONE service its debt comfortably?
With a debt-to-equity ratio of 94.26%, JONE 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. Though, since JONE is currently 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.
Are you a shareholder? JONE’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. In addition to this, the company may not be able to pay all of its upcoming liabilities from its current short-term assets. Moving forward, its financial position may change. I recommend keeping on top of market expectations for JONE’s future growth on our free analysis platform.
Are you a potential investor? JONE’s large debt ratio along with poor cash coverage as well as low liquidity coverage of short-term commitments may not build the strongest investment case. However, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of JONE’s track record. You should continue your analysis by taking a look at JONE’s past performance analysis on our free platform to conclude on JONE’s financial health.
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.