Savannah Petroleum Plc (LON:SAVP): Time For A Financial Health Check
While small-cap stocks, such as Savannah Petroleum Plc (AIM:SAVP) with its market cap of UK£231.61M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Oil and Gas industry, especially ones that are currently loss-making, are more likely to be higher risk. Assessing first and foremost the financial health is vital. I believe these basic checks tell most of the story you need to know. Nevertheless, I know these factors are very high-level, so I suggest you dig deeper yourself into SAVP here.
Does SAVP generate an acceptable amount of cash through operations?
SAVP has increased its debt level by about US$12.68M over the last 12 months made up of predominantly near term debt. With this growth in debt, SAVP currently has US$14.90M remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can examine some of SAVP’s operating efficiency ratios such as ROA here.
Does SAVP’s liquid assets cover its short-term commitments?
At the current liabilities level of US$30.57M liabilities, the company is not able to meet these obligations given the level of current assets of US$18.90M, with a current ratio of 0.62x below the prudent level of 3x.
Does SAVP face the risk of succumbing to its debt-load?
With debt at 12.31% of equity, SAVP may be thought of as appropriately levered. This range is considered safe as SAVP is not taking on too much debt obligation, which may be constraining for future growth. SAVP’s risk around capital structure is low, and the company has the headroom and ability to raise debt should it need to in the future.
Next Steps:
SAVP’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. In addition to this, 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 SAVP has been performing in the past. I suggest you continue to research Savannah Petroleum to get a more holistic view of the stock by looking at:
1. Historical Performance: What has SAVP’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.
2. 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.
