While small-cap stocks, such as SemGroup Corporation (NYSE:SEMG) with its market cap of US$1.3b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Oil and Gas companies, in particular ones that run negative earnings, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is essential. Here are few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into SEMG here.
Does SEMG produce enough cash relative to debt?
Over the past year, SEMG has reduced its debt from US$3.0b to US$2.6b – this includes long-term debt. With this reduction in debt, SEMG’s cash and short-term investments stands at US$70m for investing into the business. On top of this, SEMG has generated US$184m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 7.0%, meaning that SEMG’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for unprofitable businesses since metrics such as return on asset (ROA) requires a positive net income. In SEMG’s case, it is able to generate 0.07x cash from its debt capital.
Can SEMG pay its short-term liabilities?
Looking at SEMG’s US$682m in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$801m, leading to a 1.17x current account ratio. For Oil and Gas companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does SEMG face the risk of succumbing to its debt-load?
SEMG is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since SEMG is currently loss-making, 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.
Although SEMG’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. 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 SEMG has company-specific issues impacting its capital structure decisions. You should continue to research SemGroup to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SEMG’s future growth? Take a look at our free research report of analyst consensus for SEMG’s outlook.
- Historical Performance: What has SEMG’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.
- 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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