U.S. Markets close in 4 hrs 33 mins

Segue Resources Limited (ASX:SEG): Time For A Financial Health Check

Sean Barnes

Investors are always looking for growth in small-cap stocks like Segue Resources Limited (ASX:SEG), with a market cap of AUD A$9.84M. However, an important fact which most ignore is: how financially healthy is the company? Why is it important? A major downturn in the energy industry has resulted in over 150 companies going bankrupt and has put more than 100 on the verge of a collapse, primarily due to excessive debt. Thus, it becomes utmost important for an investor to test a company’s resilience for such contingencies. In simple terms, I believe these three small calculations tell most of the story you need to know. View our latest analysis for Segue Resources

Does SEG generate an acceptable amount of cash through operations?

ASX:SEG Historical Debt Oct 26th 17

Unxpected adverse events, such as natural disasters and wars, can be a true test of a company’s capacity to meet its obligations. These adverse events bring devastation and yet does not absolve the company from its debt. Fortunately, we can test the company’s capacity to pay back its debtholders without summoning any catastrophes by looking at how much cash it generates from its current operations. Last year, SEG’s operating cash flow was -8.27x its current debt. This means what SEG can generate on an annual basis, which is currently a negative value, does not cover what it actually owes its debtors in the near term. This raises a red flag, looking at SEG’s operations at this point in time.

Can SEG meet its short-term obligations with the cash in hand?

In addition to debtholders, a company must be able to pay its bills and salaries to keep the business running. As cash flow from operation is hindered by adverse events, SEG may need to liquidate its short-term assets to meet these upcoming payments. We test for SEG’s ability to meet these needs by comparing its cash and short-term investments with current liabilities. Our analysis shows that SEG does have enough liquid assets on hand to meet its upcoming liabilities, which lowers our concerns should adverse events arise.

Can SEG service its debt comfortably?

While ideally the debt-to equity ratio of a financially healthy company should be less than 40%, several factors such as industry life-cycle and economic conditions can result in a company raising a significant amount of debt. For SEG, the debt-to-equity ratio is 1.33%, which indicates that the company faces low risk associated with debt. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings at least three times its interest payments is considered financially sound. SEG’s profits amply covers interest at 101.06 times, which is seen as relatively safe. Lenders may be less hesitant to lend out more funding as SEG’s high interest coverage is seen as responsible and safe practice.

Next Steps:

Are you a shareholder? SEG’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Given that its financial position may change. I suggest researching market expectations for SEG’s future growth on our free analysis platform.

Are you a potential investor? Segue Resources currently has financial flexibility to ramp up growth in the future. Moreover, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. To gain more conviction in the stock, you need to further examine the company’s track record. As a following step, you should take a look at SEG’s past performance analysis on our free platform in order to determine for yourself whether its debt position is justified.


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.