Yangarra Resources Ltd. (TSE:YGR) is a small-cap stock with a market capitalization of CA$239m. 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? Oil and Gas companies, even ones that are profitable, are inclined towards being 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. Nevertheless, since I only look at basic financial figures, I recommend you dig deeper yourself into YGR here.
How does YGR’s operating cash flow stack up against its debt?
Over the past year, YGR has ramped up its debt from CA$79m to CA$120m , which includes long-term debt. With this growth in debt, YGR’s cash and short-term investments stands at CA$2.9m , ready to deploy into the business. On top of this, YGR has produced CA$78m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 66%, indicating that YGR’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In YGR’s case, it is able to generate 0.66x cash from its debt capital.
Can YGR meet its short-term obligations with the cash in hand?
Looking at YGR’s CA$62m in current liabilities, it seems that the business may not be able to easily meet these obligations given the level of current assets of CA$38m, with a current ratio of 0.62x.
Can YGR service its debt comfortably?
With a debt-to-equity ratio of 50%, YGR 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. We can test if YGR’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For YGR, the ratio of 10.86x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as YGR’s high interest coverage is seen as responsible and safe practice.
Although YGR’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. However, its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I’m sure YGR has company-specific issues impacting its capital structure decisions. I recommend you continue to research Yangarra Resources to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for YGR’s future growth? Take a look at our free research report of analyst consensus for YGR’s outlook.
- Valuation: What is YGR 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 YGR 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.
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