Investors are always looking for growth in small-cap stocks like Sanchez Midstream Partners LP (AMEX:SNMP), with a market cap of US$188.40M. However, an important fact which most ignore is: how financially healthy is the business? Oil and Gas companies, especially ones that are currently loss-making, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is crucial. Here are few basic financial health checks you should consider before taking the plunge. However, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into SNMP here.
Does SNMP generate enough cash through operations?
SNMP’s debt levels surged from US$151.32M to US$187.81M over the last 12 months , which is made up of current and long term debt. With this rise in debt, SNMP’s cash and short-term investments stands at US$321.00K , ready to deploy into the business. Additionally, SNMP has produced cash from operations of US$52.10M during the same period of time, resulting in an operating cash to total debt ratio of 27.74%, indicating that SNMP’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for loss making companies since metrics such as return on asset (ROA) requires positive earnings. In SNMP’s case, it is able to generate 0.28x cash from its debt capital.
Can SNMP meet its short-term obligations with the cash in hand?
With current liabilities at US$13.41M, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.31x. Generally, for Oil and Gas companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can SNMP service its debt comfortably?
With a debt-to-equity ratio of 60.26%, SNMP 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 SNMP is currently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
SNMP’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure SNMP has company-specific issues impacting its capital structure decisions. I suggest you continue to research Sanchez Midstream Partners to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SNMP’s future growth? Take a look at our free research report of analyst consensus for SNMP’s outlook.
- Valuation: What is SNMP 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 SNMP 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 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.